Hanaway, L. v. The Parkesburg Group , 2015 Pa. Super. 263 ( 2015 )

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2015 PA Super 263LYNN J. HANAWAY AND CONNIE IN THE SUPERIOR COURT OF
HANAWAY, PENNSYLVANIA
Appellants
v.
THE PARKESBURG GROUP, LP; PARKE
MANSION PARTNERS, LP; SADSBURY
ASSOCIATES, LP; PARKE MANSION, LLC;
AND T.R. WHITE, INC.,
Appellees No. 2564 EDA 2014
Appeal from the Judgment Entered August 14, 2014
In the Court of Common Pleas of Chester County
Civil Division at No(s): 2011-01522
BEFORE: BOWES, DONOHUE, AND STABILE, JJ.
OPINION BY BOWES, J.: FILED DECEMBER 15, 2015
Lynn J. Hanaway and Connie Hanaway appeal from the judgment
entered August 14, 2014, in favor of Appellees and dismissing their equity
claims following a non-jury trial. They also challenge the January 23, 2014
grant of summary judgment on their contract and tort claims. After careful
consideration, we affirm in part, reverse in part, and remand for further
proceedings consistent herewith.
In May 1998, the Hanaways, together with general partner T.R. White,
Inc. (“T.R. White”) and several individuals and entities who are not parties
herein, formed Sadsbury Associates, L.P. (“Sadsbury”), a limited
partnership, for purposes of developing and selling real estate. The
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Hanaways were among several limited partners. In October 2005, Lynn
Hanaway approached general partner T.R. White with a potential
development project, which the parties refer to as “the Subdivision.” T.R.
White, the Hanaways, and the other limited partners of Sadsbury Associates,
L.P., formed The Parkesburg Group, L.P. (“TPG”), to pursue the project. The
Hanaways owned 32.4% of TPG.
The Subdivision was originally intended to consist of three separate
properties: 1) the Davis Tract, a 43-acre parcel of unimproved land; 2) the
Loue Tract, a 17-acre parcel of unimproved land; and 3) the Quarry, an
11.6-acre parcel, which was owned by the Hanaways and which TPG had an
option to purchase for $180,000. TPG had options to purchase the Davis
and Loue Tracts for no less than $850,000 and $800,000, respectively.
TPG acquired the Davis Tract on July 11, 2006, and obtained
preliminary approvals for a townhome subdivision on that property.
Thereafter, TPG received several written offers from various real estate
developers for the 343 lots comprising the Davis Tract, as well as some
offers that included the Loue parcel. TPG did not pursue the offers. In
February 2007, the Hanaways, through their counsel, notified T.R. White
that the option on the Quarry had expired and that they would no longer
include that property as part of the Subdivision for development. T.R. White
then called for capital to exercise the option to purchase the Loue parcel in
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order to continue the project, but the Hanaways and the other limited
partners refused to contribute.1
Lacking funds to continue with the project, T.R. White, who had “full,
exclusive and complete discretion in the management and control of” TPG,
advised the Hanaways by correspondence dated September 25, 2007, that it
intended to get an independent appraisal and sell the Davis Tract and the
option for the Loue parcel together. See LPA at ¶6.2. On November 29,
2007, TPG sold the Davis property and the Loue option to Parke Mansion
Partners, LP (“PMP”) for $1.9 million. PMP was a limited partnership created
by T.R. White and all of the limited partners of TPG with the exception of the
Hanaways. PMP exercised the option to purchase the Loue Tract for
$800,000 the following day. The Hanaways pled that the agreement to
transfer the properties to PMP was made without their knowledge or consent
and that Appellees intentionally concealed this transfer from them.
Complaint, ¶ 43.
On February 11, 2011, two and one-half years after the transfer of the
Davis Tract and Loue option to PMP, the Hanaways filed a complaint against
TPG, PMP, Sadsbury, and T.R. White, Appellees herein. They alleged breach
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1
The limited partnership agreement provided that the limited partners had
no obligation to contribute money to the limited partnership beyond their
initial capital contribution. Limited Partnership Agreement, ¶5.3.
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of contract, conversion, and breach of fiduciary duty, and sought an
accounting, appointment of a receiver, and alternative equitable relief. The
Hanaways had originally invested $316,216.22 in TPG, but upon its
liquidation only received $196,083.20. They sought to recover the $120,000
deficit in the value of their investment in the real estate development
project, which they contended was sold significantly below market value by
T.R. White on behalf of TPG in order to eliminate the Hanaways’ ownership
interest in the real estate. Partial summary judgment was granted in favor
of all Appellees on the conversion and breach of fiduciary duty counts based
on the expiration of the two-year statute of limitations for tort claims and on
the contract count for failure to state a claim.
A bench trial commenced on July 7, 2014, on the remaining claims for
equitable relief. On August 14, 2014, the court found in favor of Appellees,
concluding, inter alia, that the doctrine of laches barred the Hanaways’
equity claims. No post-trial motions were filed. The Hanaways appealed to
this Court on September 3, 2014, and complied with the trial court’s order to
file a Pa.R.A.P. 1925(b) concise statement of errors complained of on
appeal. The Hanaways present five issues for our review:
I. Where a partnership agreement contained a requirement
that all notices to parties be made by personal delivery or sent
by registered mail and the general partner sent only a vague
notice of a sale of real estate by regular mail, did the lower
Court commit an error of law by ruling that the Plaintiffs received
proper notice of the sale based upon constructive or actual
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knowledge so as to commence the running of the statutory
period of limitations?
II. Where a deed conveys real estate from one partnership
where the Plaintiffs were partners to another partnership
(surreptitiously established by all the partners of the conveying
partnership except the Plaintiffs) and the deed conveying the real
estate sets forth only the names of the grantor LP and the
grantee LP, not the underlying owners of each entity, did the
Court commit an error of law by finding that the deeds provided
constructive notice of the transfer to the Plaintiffs sufficient to
commence the running of the statutory period of limitations?
III. Where the Defendants concealed material facts and
information concerning the transfer of the real estate, failed to
comply with the notice requirements of the partnership
agreement for the transfer of the real estate, withheld
information regarding ownership of the transferee entity,
extensively misrepresented financial ownership regarding the
distribution of the proceeds from the sale of the real estate and
continued to improperly withhold information and documents
after the Complaint was filed, did the Court abuse its discretion
in determining that the discovery rule or the concealment
doctrine did not preclude the running of the statutory period of
limitations?
IV. If the trial judge improperly ruled as a matter of law that
the lapse of the statute of limitations precluded the assertion of
Plaintiffs’ tort claims, did the Court also commit an error of law
by dismissing Plaintiffs’ claims in equity based upon the theory of
laches solely in reliance upon the expiration of the statute of
limitations for Plaintiffs’ tort claims?
V. Where the partnership agreement guaranteed that
Plaintiffs would receive 32.4% of the partnership profits and the
Defendants sold real estate of the partnership in a bad faith
transaction to another partnership (consisting of the same
partners who owned the grantor except for Plaintiffs) at a price
nearly six million dollars below fair market value, did the trial
judge commit an error of law by ruling that the Defendants did
not breach the duty of good faith in every contract?
Appellants’ brief at 3-4.
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The Hanaways’ first three issues challenge the propriety of the trial
court’s dismissal of their conversion and breach of fiduciary duty claims as
time-barred by the two-year tort statute of limitations. “Summary judgment
is appropriate only in those cases where the record clearly demonstrates
that there is no genuine issue of material fact and that the moving party is
entitled to judgment as a matter of law.” Atcovitz v. Gulph Mills Tennis
Club, Inc., 812 A.2d 1218, 1221 (Pa. 2002); Pa.R.C.P. 1035.2(1). In ruling
on a motion for summary judgment, “the trial court must resolve all doubts
as to the existence of a genuine issue of material fact against the moving
party,” and grant summary judgment only “where the right to such
judgment is clear and free from all doubt.” Id.On appeal,
we may reverse a grant of summary judgment if there has been
an error of law or an abuse of discretion. But the issue as to
whether there are no genuine issues as to any material fact
presents a question of law, and therefore, on that question our
standard of review is de novo. This means we need not defer to
the determinations made by the lower tribunals. Weaver v.
Lancaster Newspapers, Inc., 592 Pa. 458, 926 A.2d 899,
902-03 (Pa. 2007) (internal citations omitted). To the extent
that this Court must resolve a question of law, we shall review
the grant of summary judgment in the context of the entire
record. Id. at 903.
Summers v. Certainteed Corp., 997 A.2d 1152, 1159 (Pa. 2010).
The Hanaways mount a multi-pronged attack on the trial court’s ruling
that their tort claims were time barred. Initially, they contend that since
TPG’s notice of the transfer of the Davis Tract and Loue option by first class
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mail did not comply with the express written notice requirements of the
Limited Partnership Agreement (“LPA”), the statute of limitations did not
commence to run and summary judgment was improper on that basis.
Appellees counter that whether notice was sent by registered or certified
mail is irrelevant to a determination of when the statute of limitations began
to run since the limitations period commences when one knows or
reasonably should know that a cause of action has accrued. They contend
that the Hanaways cannot avail themselves of the tolling provisions of the
discovery rule because they had actual knowledge as well as constructive
notice of the transfers by 2008. Appellees rely upon Dalrymple v. Brown,
701 A.2d 164, 167 (Pa. 1997), in support of their position that the discovery
rule only comes into play where the existence of the injury is unknown and
cannot be ascertained within the applicable statute of limitations with the
exercise of reasonable diligence.
Alternatively, the Hanaways argue that the trial court erred in relying
upon Weik v. Estate of Brown, 794 A.2d 907 (Pa.Super. 2002), for the
proposition that the recording of the deeds provided constructive notice to
them of possible tort claims and started the running of the statute of
limitations on those claims. In Weik, the recording of deeds was held to be
constructive notice to plaintiff of the property transfer and breach of his
option agreement for purposes of the statute of limitations. The Hanaways
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argue that Weik is distinguishable because there was no contract requiring
all notices to be sent by certified mail in that case.
Lastly, the Hanaways argue that the statute of limitations was tolled
because T.R. White and TPG concealed and withheld information that would
have enabled them to discover that the transaction was intended to
eliminate their ownership. They point to evidence that they were denied
access to records and that T.R. White intentionally misrepresented financial
information to conceal its intentions. Appellees respond that the Hanaways
had both actual knowledge and constructive notice of the facts underlying
their claims. They point to the Hanaways’ knowledge in 2008 that TPG sold
the property to PMP for a price that the Hanaways believed was too low, and
that the impetus for the sale was the Hanaways’ refusal to contribute further
funds for the development of the property.
The trial court concluded that the tort actions were time-barred
because the Hanaways had actual knowledge of the transfer of the Davis
tract and Loue option due to the receipt of correspondence notifying them of
the sale. The court rejected the Hanaways’ contention that the notice
requirements in the limited partnership agreement distinguished Weik,
finding them “irrelevant to the standard for assessing the start date for the
running of the statute of limitations.” Trial Court Opinion, 8/14/14, at 4.
The basic legal principles applicable to the statute of limitations are set
forth in Fine v. Checcio, 870 A.2d 850 (Pa. 2005), wherein the Supreme
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Court examined the application of both the discovery rule and the doctrine of
equitable tolling due to fraudulent concealment. Wilson v. El-Daief, 964
A.2d 354 (Pa. 2009).
Fine reflects the general rule that a cause of action accrues,
and thus the applicable limitations period begins to run, when an
injury is inflicted. In certain cases involving latent injury, and/or
instances in which the causal connection between an injury and
another's conduct is not apparent, the discovery rule may
operate to toll the statute of limitations until the plaintiff
discovers, or reasonably should discover, that she has been
injured and that her injury has been caused by another party's
conduct. Fine also reflects that the determination concerning
the plaintiff's awareness of the injury and its cause is fact
intensive, and therefore, ordinarily is a question for a jury to
decide. However, courts may resolve the matter at the summary
judgment stage where reasonable minds could not differ on the
subject.
Id. at 361-62 (citations and footnote omitted). As this Court noted in
Coleman v. Wyeth Pharmaceuticals, Inc., 6 A.3d 502, 511 (Pa.Super.
2010) (quoting in part Pocono International Raceway, Inc. v. Pocono
Produce, Inc., 468 A.2d 468, 471 (Pa. 1983)), “[i]f the injured party could
not ascertain when he was injured and by what cause within the limitations
period, ‘despite the exercise of reasonable diligence,’ then the discovery rule
is appropriate.”
Due diligence is ascertained by an objective standard, Coleman,
supra, and to “demonstrate reasonable diligence, a plaintiff is required to
establish that he exhibited ‘those qualities of attention, knowledge,
intelligence and judgment which society requires of its members for the
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protection of their own interests and the interests of others.’” Wilson,
supra at 363 n.6 (quoting in part Cochran v. GAF Corp., 666 A.2d 245,
249 (Pa. 1995)). The party seeking application of the discovery doctrine
bears the burden of proof. Wilson, supra; Coleman, supra.We agree with the trial court that the technical deficiency in the notice
is of no consequence in our statute of limitations analysis. In determining
whether the discovery rule operated to toll the running of the statute of
limitations on tort claims, breach of a contractual notice provision is only
relevant to the extent that it demonstrates actual lack of notice or
knowledge. The discovery rule only will operate to toll the running of the
statute of limitations where, despite due diligence, one is unaware that he
has been injured and has a cause of action.
Although the Hanaways did not receive notice of the sale by registered
or certified mail return receipt requested, it is undisputed that they received
notice by first class mail and had actual knowledge of the transfer. The
Hanaways admitted that they learned by May 2008 that TPG transferred to
PMP the Loue option, and by December 2008, the Davis tract. Answers to
Interrogatories, Exhibit 9 at No. 7. The Hanaways’ daughter conducted an
online deed search in 2008 that revealed PMP’s purchase of both properties
and she admitted that she showed the information to Mr. Hanaway. Id.,Exhibit 10, at 110-11. In addition, counsel for the Hanaways received an
appraiser’s report on February 15, 2008, concluding that the sale of the
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Davis tract to PMP for $1.9 million was far below that property’s fair market
value.2 Moreover, as early as May 8, 2008, Mr. Hanaway referenced the
transfer in a memorandum to counsel and complained that he received no
notice, was not included in the transaction, and questioned the legality of
the sale. Thus, there is no genuine issue of fact regarding the Hanaways’
notice or knowledge of the sale of the Davis tract and Loue option to PMP
more than two years prior to the filing of the instant lawsuit.
The Hanaways argue, however, that knowledge or notice of the sales
was not sufficient to apprise them of possible claims. They maintain that the
recorded deeds merely listed the buyer as PMP and did not list the owners of
PMP. They contend that they could not institute suit earlier because they did
not know whether they were partners in PMP. The trial court found,
however, that the Hanaways failed to identify a single fact that would
reasonably suggest that they were partners in PMP. They admittedly had
not signed a partnership agreement for PMP, contributed to that partnership,
or received a tax return from that entity. Deposition of Lynn Hanaway,
4/4/13, at 163-66. Furthermore, the court noted that they actually filed suit
prior to the date they claimed to have learned who owned PMP, which the
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2
The Hanaways’ appraiser assigned a market value of $8.5 million to the
unimproved Davis and Loue properties, which had been approved for the
construction of 323 townhouses.
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court viewed as proof that ignorance of PMP’s owners was no impediment to
bringing the action. Order, 1/23/14, at n.1.
Where, as here, the Hanaways had both constructive notice and actual
knowledge of the transfers, we agree that they were in possession of
sufficient facts to prompt inquiry into the effect of the transfer on their own
interests. Once the Hanaways knew that TPG sold the Davis tract and Loue
option to PMP for what they believed to be less than market value, the
limitations period commenced to run. We find no merit in the Hanaways’
arguments that the discovery rule operated to toll the statute of limitations.
Nor did the Hanaways identify any misrepresentation on the part of
Appellees tantamount to fraudulent concealment that purportedly caused
them to limit their inquiry or relax their vigilance and toll the statute of
limitations. The record substantiates that the Hanaways were aware that,
due to a lack of working capital, T.R. White intended to sell the property.
Correspondence between the Hanaways and T.R. White suggests that they
were at odds over the use of the property. The record reveals that the
Hanaways sought legal advice early on, hired an appraiser, and checked the
property transfers. This conduct is inconsistent with that of parties
complacent in the belief that their partners were acting in their best interest.
Thus, the Hanaways have not offered facts that would operate to toll the tort
statute of limitations based on fraudulent concealment. The tort claims were
asserted after the expiration of the two-year statute of limitations, and we
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find no error in the trial court’s grant of summary judgment in favor of
Appellees on that basis.
Next, the Hanaways allege that the trial court erred in dismissing their
equity claims based upon the doctrine of laches. The mere passage of time
is not enough, according to the Hanaways, for the defense to apply. The
Hanaways argue that Appellees had the burden of showing prejudice due to
the five-month delay, which they failed to do. See Young v. Hall and
Behrand, 218 A.2d 781 (Pa. 1966). Furthermore, the Hanaways
maintained they were entitled to trust their partners and relax their vigilance
due to the existence of a fiduciary relationship between them. The
Hanaways contend that they were not required to strictly comply with
statutes of limitation in light of the special relationship that lulled them into
believing that their partners’ actions were proper.
Appellees counter that the Hanaways waived any objection to the trial
court’s finding of laches by failing to file a post-trial motion within ten days
after the court’s decision in the non-jury trial. See Pa.R.C.P. 227.1(c).
Such a motion is required in an equity proceeding. See Chalkey v. Roush,
805 A.2d 491, 494 (Pa. 2002). Furthermore, the Hanaways compounded
that waiver by failing to identify this as error in their Pa.R.A.P. 1925(b)
concise statement of errors complained of on appeal. Consequently, the trial
court did not address this issue in its Rule 1925(a) opinion.
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Additionally, Appellees point out that the Hanaways’ equity claims for
appointment of a receiver and equitable accounting were denied on
additional bases, which they have not challenged on appeal. Thus, Appellees
contend, even if there was merit in the Hanaways’ laches argument, it would
not constitute reversible error. Finally, Appellees submit that the argument
fails on the merits. They offer authority to the effect that laches typically
follows the statute of limitations. See Ebbert v. Plymouth Oil Co., 34
A.2d 493, 495 (Pa. 1943); Ritter v. Theodore Pendergrass Teddy Bear
Prods., Inc., 514 A.2d 930, 934 (Pa.Super. 1986).
Although we find merit in the Hanaways’ position that a laches defense
involves a showing of prejudice, and that arguably no showing was made
herein, the Hanaways’ failure to file a motion for post-trial relief challenging
the court’s finding in this regard is fatal. Post-trial motions must be filed
within ten days after the filing of a decision in the case of a trial without a
jury. Pa.R.C.P. 227.1(c)(2). The failure to raise an issue in a post-trial
motion results in waiver of the issue on appeal. Bensinger v. Univ. of
Pittsburgh Med. Ctr., 98 A.3d 672 (Pa.Super. 2014). We agree with the
trial court that the Hanaways failed to preserve this claim.
We turn now to the Hanaways’ final claim that the trial court erred in
granting summary judgment and dismissing their breach of contract claim.
The breach of contract claim was originally asserted against TPG, Sadsbury,
and their general partner, T.R. White, but subsequently focused on T.R.
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White and its improper use of a capital call directed to the Hanaways,
inadequate notice of sale of the property, and sale of TPG property at a price
$6 million below market value. The Hanaways maintain that T.R. White
breached both the express terms of the limited partnership agreement and
its implied covenant of good faith and fair dealing, and that the trial court
erroneously determined, as a matter of law, that T.R. White’s exclusive right
to manage the business of TPG negated any duty of good faith implied in the
partnership agreement.3 The Hanaways assert that where an obligation
necessary to a party’s enjoyment of the benefits of the contract is not
specifically provided, it may be implied to prevent a bad faith breach. They
argue that T.R. White was obligated to exercise its management powers in
good faith and in a manner that would permit the Hanaways to enjoy the
profits due them. The sale of TPG property to PMP at a price well below
market value resulted in a substantial loss of their original investment and
eliminated any profit to them while benefitting T.R. White and the other
limited partners operating as PMP.
T.R. White counters that the trial court properly found that it had the
exclusive right and discretion to manage the partnerships, including the sale
of property, and that the Hanaways failed to identify any provision of the
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3
We read the Hanaways’ pleadings as alleging a breach of contract premised
on T.R. White’s bad faith sale of TPG property.
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LPA that was breached by selling the Davis tract and Loue option below
market value. Order, 1/23/14, at n.1. Specifically, the trial court found that
the Hanaways failed to plead that the capital call and lack of certified mail
notice of the sale of property constituted breaches of the partnership
agreement, and additionally found no merit in those claims. Trial Court
Opinion, 10/30/14, at 5-7. Finally, the trial court found that breach of the
implied covenant of good faith and fair dealing could not override the
express terms of the contract conferring unfettered discretion upon the
general partner to sell partnership property. Id. at 8. Since we conclude
that T.R. White was bound to act in good faith and deal fairly in the
performance of his duties under the LPA, including the exercise of its
discretion to sell the properties, we disagree with the trial court’s latter
conclusion.
The intermediate appellate courts of this Commonwealth have applied
the Restatement (Second) of Contracts § 205, which provides that, “Every
contract imposes on each party a duty of good faith and fair dealing in its
performance and its enforcement.” This Court invoked § 205 in Baker v.
Lafayette College, 504 A.2d 247 (Pa.Super. 1986), and held that where
the College expressly provided in an employment contract for a
comprehensive evaluation and review process, it had a limited duty to
conduct that evaluation in good faith. We noted that the College’s obligation
to act in good faith extended to the performance of the duties it assumed
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under the contract and found this consistent with the general duty of
contracting parties to perform their contractual obligations in good faith as
set forth in the Restatement (Second) of Contracts §205.4
In Somers v. Somers, 613 A.2d 1211 (Pa.Super. 1992), after noting
that the general duty of good faith and fair dealing of § 205 had been
adopted earlier in Baker, supra, and Creeger Brick & Building Supply
Inc. v. Mid-State Bank & Trust Co., 560 A.2d 151, 153 (Pa.Super. 1989),
this Court applied it to a consulting agreement. In that case, an uncle sold a
portion of his stock in his construction company to his nephew and
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4
In Ash v. Cont’l Ins. Co., 932 A.2d 877, 883 (Pa. 2007), our High Court
noted “considerable disagreement over the applicability of the implied duty
of good faith.” It observed that the Superior Court opined in Herzog v.
Herzog, 887 A.2d 313, 317 (Pa.Super. 2005) and John B. Conomos, Inc.
v. Sun Company, Inc., 831 A.2d 696, 705-06 (Pa.Super. 2003), that
Pennsylvania has adopted § 205 and applied it to every contract. The
Commonwealth Court also has recognized the § 205 implied covenant, but
limited its application. See Agrecycle, Inc. v. City of Pittsburgh, 783
A.2d 863 (Pa.Cmwlth. 2001) (a separate duty of good faith performance of
contracts “may not be implied where (1) a plaintiff has an independent
cause of action to vindicate the same rights with respect to which the
plaintiff invokes the duty of good faith; (2) such implied duty would result in
defeating a party's express contractual rights specifically covered in the
written contract by imposing obligations that the party contracted to avoid;
or (3) there is no confidential or fiduciary relationship between the
parties.”). Department of Transportation v. E-Z Parks, Inc., 620 A.2d
712 (Pa.Cmwlth. 1993). The Ash Court also pointed out that several
Justices have stated in non-precedential opinions that the § 205 duty is
implied in every contract. See Bethlehem Steel Corp. v. Litton
Industries, Inc., 488 A.2d 581, 600 (Pa. 1985) (Zappala, J., Opinion in
Support of Reversal); Frickert v. Deiter Bros. Fuel Co., 347 A.2d 701, 705
(Pa. 1975) (Pomeroy, J., concurring). However, the Ash Court declined to
discuss the issue, as it was not before the Court.
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surrendered his remaining shares for redemption, resulting in the nephew
becoming the sole shareholder and president of the corporation. At the
same time, uncle was hired as a consultant pursuant to an agreement that
gave him the authority to act with the nephew regarding a particular
construction project. In addition to monthly consulting fees, uncle was to
receive fifty percent of the net profits from that project. At the conclusion of
construction, there were outstanding claims among the corporation, the
Office of General Services, and various subcontractors. When uncle and
nephew disagreed over the handling of these claims, nephew terminated his
uncle’s employment. Uncle filed a suit alleging that his nephew showed a
lack of good faith and due diligence in the resolution of the dispute. He
claimed that nephew settled the corporation’s claim for significantly less than
was owed, thereby depriving uncle of approximately $3 million as his share
of the net profits. Although uncle did not assert a breach of a specific
contractual provision, this Court held that the uncle stated a claim for breach
of contract “based on the implied obligation to act in good faith and do
nothing to destroy the rights of the other party to receive the fruits of the
agreement[,]” id. at 1215, and reversed the grant of a demurrer.
Years later, in Murphy v. Duquesne Univ. of the Holy Ghost, 777
A.2d 418, 434 (Pa. 2001), our Supreme Court agreed with this Court’s
statement in Baker, supra, that “when an employer expressly provides in
an employment contract for a comprehensive evaluation and review process,
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a court may look to the employer's good faith to determine whether the
employer has in fact performed those contractual duties.” Id. at 255.
Without referencing § 205, our High Court pointed out that, “this obligation
of good faith is tied specifically to and is not separate from the duties a
contract imposes on the parties” and “is akin to the contract doctrine of
necessary implication.” Id. It described the doctrine:
In the absence of an express provision, the law will imply an
agreement by the parties to a contract to do and perform those
things that according to reason and justice they should do in
order to carry out the purpose for which the contract was made
and to refrain from doing anything that would destroy or injure
the other party's right to receive the fruits of the contract.
Murphy, supra at 434 n.11 (quoting Slater v. Pearle Vision Center, 546
A.2d 676, 679 (Pa.Super. 1988) (quoting Frickert v. Deiter Bros. Fuel Co.
Inc., 347 A.2d 701 (Pa. 1975) (Pomeroy, J., concurring))).
Just two years later, this Court decided John B. Conomos, Inc. v.
Sun Company, Inc., 831 A.2d 696 (Pa.Super. 2003). Sun contracted with
Conomos for industrial painting services at its refinery. Sun’s inspector
found the surface preparation of the pipe by Conomos to be unacceptable
and demanded preparation that Conomos believed exceeded the industry
standard and agreed upon scope of work. Conomos complied with the
additional requirements, but incurred added expense. When Conomos
sought additional compensation and Sun did not respond, Conomos left the
job and Sun cancelled the contract. Conomos sued for the balance due
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under the contract, the cost of the additional preparation required, and
asserted a claim under the Contractor and Subcontractor Payment Act.
At issue was whether Sun owed a duty of good faith to Conomos,
whether that duty was breached, and if so, what implications that breach
had on the limited damages clause in the contract. We found that there was
an implied duty of good faith in Sun’s contractual duty to inspect the surface
preparation performed by Conomos so as not to “defeat Conomos’s
reasonable expectation that work of sufficient quality will be compensated as
agreed.” Conomos, supra at 707. We explained that, “[b]oth the implied
covenant of good faith and the doctrine of necessary implication are
principles for courts to harmonize the reasonable expectations of the parties
with the intent of the contractors and the terms in their contract.” Id. The
doctrines “serve to imply terms that the parties would have spelled out had
they foreseen their need, a breach of such implied terms is equivalent to a
breach of any other provision in the contract.” Id. at 708. See also
Herzog v. Herzog, 887 A.2d 313 (Pa.Super. 2005) (characterizing the
implied term of fair dealing in § 205 as “the principle fundamental to
contract law” and finding such a duty in marital settlement agreement).
As these cases demonstrate, a breach of the covenant of good faith
and fair dealing is a breach of contract action, not an independent action for
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breach of a duty of good faith.5 LSI Title Agency, Inc. v. Evaluation
Servs., 951 A.2d 384, 391 (Pa.Super. 2008). The implied covenant of good
faith and fair dealing attaches to existing contractual obligations; it does not
add new contractual duties. In essence, the duty to act in good faith and
deal fairly infuses the parties’ performance of their express contractual
obligations. In determining whether there has been a breach of contract, we
evaluate the conduct of a party through the lens of good faith and fair
dealing.
With slight variances due to context, good faith is understood to mean
“faithfulness to an agreed common purpose and consistency with the
justified expectations of the other party; it excludes a variety of types of
conduct characterized as involving ‘bad faith’ because they violate
community standards of decency, fairness or reasonableness.” Restatement
(Second) of Contracts §205, Comment a. In Cable & Associates Ins.
Agency v. Commercial Nat’l Bank of Pennsylvania, 875 A.2d 361, 364
(Pa.Super. 2005) (quoting Gorski v. Smith, 812 A.2d 683, 710 (Pa.Super.
____________________________________________
5
The dissent’s contention that the Hanaways abandoned their claim that
T.R. White breached the express terms of the partnership agreement by
arguing breach of an implied duty of good faith and fair dealing is incorrect.
On the contrary, the Hanaways’ breach of contract claim is premised on T.R.
White’s bad faith performance of its contractual obligations. Nor are we
recognizing a new cause of action for breach of such an implied covenant.
When a party fails to perform its contractual obligations in good faith, an
action for breach of contract is the remedy.
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2003)), we defined the duty of good faith as “[h]onesty in fact in the
conduct or transaction concerned.”
The contract at issue herein is the LPA. It provides that “the business
and affairs of the Partnership shall be controlled by the General Partner.”
LPA, Art. VI, ¶6.1. In addition, “[t]he General Partner shall have full,
exclusive and complete discretion in the management and control of the
business of the Partnership, and shall have all such other powers of a
general partner in a partnership formed under Pennsylvania law without
limited partners, the exercise of which are consistent with the Business of
the Partnership.” LPA, Art. VI, ¶6.2; see also Clement v. Clement, 260
A.2d 728 (Pa. 1970); Jarl Invs., L.P. v. Fleck, 937 A.2d 1113 (Pa.Super.
2007).6
It is undisputed that T.R. White owed a fiduciary duty to TPG and its
limited partners. See 15 Pa.C.S. § 8334; see also eToll, Inc. v.
Elias/Savion Adver., 811 A.2d 10, 22 (Pa.Super. 2002) (A fiduciary duty
arises from a “special relationship” between the parties involving
“confidentiality, the repose of special trust, or fiduciary responsibilities.”).
However, any remedy for T.R. White’s alleged breach of fiduciary duty was
____________________________________________
6
Generally, unless otherwise provided in the limited partnership agreement,
a general partner of a limited partnership has the same rights, powers, and
restrictions as a partner in a partnership without limited partners. 15
Pa.C.S. § 8333.
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grounded in tort and was time-barred. The question before us is whether
Pennsylvania law imputes the same implied duty of good faith and fair
dealing in the performance of contractual duties in a limited partnership
agreement as in other contracts. In performing its management duties, did
T.R. White have a duty to act in good faith and consistently with the limited
partners’ expectations? For the reasons that follow, we answer that
question in the affirmative, finding no reason to treat a limited partnership
agreement differently than any other contract.7
The highest court in our neighboring state of Delaware explained the
difference between the covenant of good faith and fair dealing and a
fiduciary duty in the context of a limited partnership agreement in Gerber v.
Enterprise Products Holdings, LLC, 67 A.3d 400 (Del. 2013) (overruled
on other grounds by Winshall v. Viacom Intern., Inc., 76 A.3d 808 (Del.
2013)). The distinction is significant under Delaware law because parties to
limited partnership agreements are permitted to contractually “expand,
____________________________________________
7
The dissent maintains that limited partnership contracts are unique
because limited partnerships are statutory creations. It implies that absent
legislative recognition of an implied covenant in a limited partnership
agreement, none exists. The dissent does not cite any authority for that
proposition. In light of the fact that the legislature is presumed to know the
existing law when it passes a statute, we submit that the fact the legislature
did not specifically abrogate an implied covenant of good faith and fair
dealing in a limited partnership agreement suggests that it intended to
include the covenant in such contracts.
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restrict, or eliminate any fiduciary duties that a person may owe.” Delaware
Revised Uniform Limited Partnership Act, 6 Del. C. § 17-1101(d). That same
section also provides, however, that the parties cannot contract to eliminate
the implied contractual covenant of good faith and fair dealing. Id. Thus, in
Delaware, the implied covenant of good faith and fair dealing provides a
viable alternate remedy in contract where the fiduciary duty has been
restricted.8
____________________________________________
8
The Gerber Court explained the difference between a fiduciary duty and
the implied covenant of good faith and fair dealing:
Under a fiduciary duty or tort analysis, a court examines the
parties as situated at the time of the wrong. The court
determines whether the defendant owed the plaintiff a duty,
considers the defendant's obligations (if any) in light of that
duty, and then evaluates whether the duty was breached.
Temporally, each inquiry turns on the parties' relationship as it
existed at the time of the wrong.
....
An implied covenant claim, by contrast, looks to the past. It is
not a free-floating duty unattached to the underlying legal
documents. It does not ask what duty the law should impose on
the parties given their relationship at the time of the wrong, but
rather what the parties would have agreed to themselves had
they considered the issue in their original bargaining positions at
the time of contracting. . . . [Fair dealing] is rather a
commitment to deal "fairly" in the sense of consistently with the
terms of the parties' agreement and its purpose. Likewise, "good
faith" does not envision loyalty to the contractual counterparty,
but rather faithfulness to the scope, purpose, and terms of the
parties' contract.
(Footnote Continued Next Page)
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The Gerber plaintiffs alleged that the general partner defendant
breached its express contractual duties and the implied covenant of good
faith and fair dealing under a limited partnership agreement. Specifically,
the plaintiffs pled that the general partner exercised its discretion to use the
special approval process in bad faith. The chancery court refused to permit
recovery on the breach of implied covenant theory; rather, it found the
implied covenant was only a “gap filler” that could not form the basis of a
claim based on conduct expressly authorized by a limited partnership
agreement.
The Delaware Supreme Court rejected that reasoning. It held that
“[w]hen exercising a discretionary right, a party to the contract must
exercise its discretion reasonably.” Gerber, supra at 419 (quoting ASB
Allegiance Real Estate Fund v. Scion Breckenridge Managing
Member, LLC, 50 A.3d 434, 442 (Del. Ch. 2012), aff'd in part, rev'd in part
on other grounds, 68 A.3d 665 (Del. 2013)). The court explained that an
implied covenant “seeks to enforce the parties’ contractual bargain by
implying only those terms that the parties would have agreed to during their
original negotiations if they had thought to address them.” Gerber, supra_______________________
(Footnote Continued)
Gerber v. Enterprise Products Holdings, LLC, 67 A.3d 400, 418-19 (Del
2013) (quoting ASB Allegiance Real Estate Fund v. Scion Breckenridge
Managing Member, LLC, 50 A.3d 434, 440-42 (Del. Ch. 2012), aff'd in
part, rev'd in part on other grounds, 68 A.3d 665 (Del. 2013).
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at 418. It protects the parties’ reasonable expectations by looking
retrospectively to discern what the parties would have agreed to had they
considered the issue in their original bargaining rather than at the time of
the breach. Thus, the court looked at the reasonable expectations of the
parties when contracting to see if the general partner acted unreasonably,
thereby frustrating the fruits of the bargain that Gerber reasonably
expected.
In Winshall, supra, the Supreme Court of Delaware explained the
limited scope and function of the implied covenant. The covenant cannot be
applied to afford the plaintiffs “contractual protections that ‘they failed to
secure for themselves at the bargaining table.’’’ Winshall, supra at 816(quoting Aspen Advisors LLC v. United Artists Theatre Co., 861 A.2d
1251, 1260 (Del. 2004)). “Rather, a party may only invoke the protections
of the covenant when it is clear from the underlying contract that ‘the
contracting parties would have agreed to proscribe the act later complained
of . . . had they thought to negotiate with respect to the matter.’” Id.(quoting Dunlap v. State Farm Fire & Cas. Co., 878 A.2d 434, 442 (Del.
2005)). In Winshall, the court refused to find an implied covenant in a
merger agreement to maximize post-merger earn-out payments to selling
shareholders, finding that the parties could and should have contracted for
that at the time of the merger.
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Pursuant to the LPA herein, T.R. White was responsible for managing
and controlling the limited partnership and it was given broad discretion in
doing so. It is the Hanaways’ contention, however, that they reasonably
expected that the general partner would not exercise that discretion in bad
faith by selling the assets of TPG at less than fair market value for its own
benefit and that of like-minded limited partners to their detriment and that
of TPG.9 The situation herein is much like the one in Gerber, supra, and
____________________________________________
9
The dissent takes the position that the covenant is not implied in every
contract, and in support thereof cites considerable authority including Cable
& Associates Ins. Agency, Inc. v. Commercial Nat. Bank of
Pennsylvania, 875 A.2d 361 (Pa.Super. 2005) for the proposition that no
covenant of good faith exists between lenders and borrowers. The dissent
misapprehends Cable. We held therein that there was no separate duty of
good faith between a lender and a borrower based on the legal relationship,
and no need to create one, “due to the existence of this ‘good faith’
cause of action sounding in contract.” Id. at 364 (emphasis added).
We acknowledged that a borrower could plead sufficient facts to state a
claim “that a lender violated its general duty of ‘good faith’ arising out of the
law of contracts.” Id.; see, e.g., Corestates Bank, N.A. v. Cutillo, 723
A.2d 1053 (Pa.Super. 1999).
Furthermore, the dissent contends that since an implied covenant cannot
trump the express language of a contract or impose additional terms. It
adds that no implied covenant exists in the instant case because the LPA
imposed specific limitations upon T.R. White’s discretion. We disagree. The
LPA expressly conferred upon T.R. White complete and exclusive discretion
in the management of TPG and the authority to buy and sell partnership
property. T.R. White pointed to that unfettered discretion in contending that
sale of the properties did not violate the terms of the LPA. See Motion for
Summary Judgment, at ¶¶60, 63 (maintaining that T.R. White did not
breach the contract as it was within its right to sell the properties by virtue
of its exclusive and complete discretion to manage the partnership). The
Hanaways denied that T.R. White had absolute discretion and averred that
(Footnote Continued Next Page)
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we find that reasoning persuasive.10 Despite the fact that the limited
partnership agreement therein expressly conferred discretion upon the
general partner to undertake the special approval process, the Delaware
court recognized an implied duty to exercise that discretion in good faith.
Herein, although T.R. White had discretion in the management of TPG and
the sale of the properties, the implied covenant of good faith and fair dealing
imposed a duty to exercise that contractual obligation in good faith. Thus,
we find that the implied covenants of good faith and fair dealing operate in
this circumstance and color the determination of whether T.R. White
breached the LPA.
_______________________
(Footnote Continued)
its conduct was bound by the covenants of good faith and fair dealing. See
Answer of Plaintiffs to the Defendants’ Motion for Partial Summary Judgment
on Counts I, II, and III of Plaintiffs’ Complaint, at ¶5. We agree that the
implied covenant operates to require T.R. White to perform its contractual
duties in good faith. Hence, in determining whether there has been a breach
of the LPA, T.R. White’s conduct must be viewed through that lens.
10
We recognize that the Delaware limited partnership statute is different
from Pennsylvania’s statute. Contrary to the dissent’s assertion, we are not
adopting Delaware law. Both states recognize an implied covenant of good
faith and fair dealing in contracts generally and recent Delaware cases offer
insight into how the covenant operates in the context of a limited
partnership agreement. We find Delaware’s view that the covenant does not
add new terms but acts to require a contracting party to exercise its
discretion reasonably and to protect the other party’s reasonable
expectations to be consistent with Pennsylvania’s view of such a covenant in
Baker v. Lafayette College, 504 A.2d 247 (Pa.Super. 1986), Somers v.
Somers, 613 A.2d 1211 (Pa.Super. 1992), Murphy v. Duquesne Univ. of
the Holy Ghost, 777 A.2d 418, 434 (Pa. 2001), John B. Conomos, Inc. v.
Sun Company, Inc., 831 A.2d 696 (Pa.Super. 2003), and the other
Pennsylvania cases cited herein.
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The only issue remaining is whether the record contains sufficient
evidence of such a breach to create a jury question. 11 In opposition to
summary judgment on their contract claim, the Hanaways proffered the
following evidence. On July 1, 2005, the Nolen Group expressed interest in
purchasing the Davis tract for a total consideration of $10,496,000.
Memorandum of Plaintiffs in Opposition to the Defendant’ Motion for
Summary Judgment, Exhibit 2. By correspondence dated July 21, 2005,
Heritage Land Group submitted a draft agreement for the purchase of 328
approved lots in the Davis tract for $9,500,000. Id. The Gambone
Development Company submitted a letter of intent to purchase the Davis
property for $38,000 per townhouse unit for 328 units. Id. The McKee
Group proposed a purchase of the Davis property, which it described as
sixty-one acres in Parkesburg Borough, consistent with both the Davis and
Loue tracts, for $21,325,000. Id. Ryan Homes expressed interest in
purchasing the 328 fully-improved townhome lots for $65,000 each, which
totals $21,320,000. TPG ultimately sold the Davis tract for $1.9 million and
____________________________________________
11
As the dissent correctly points out, T.R. White is only subject to liability in
contract for “intentional violation of any term of this Agreement.” LPA at §
6.9. The pleadings and the evidence, taken in the light most favorable to
the Hanaways, are sufficient to present a genuine issue of material fact as to
whether T.R. White intentionally violated the LPA.
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the Loue option for ten dollars, to PMP.12 T.R. White does not dispute that
PMP, a limited partnership consisting of all the partners of TPG with the
exception of the Hanaways, was formed with the intention of removing the
Hanaways from any interest in the Davis tract and Loue option.
Taking the evidence and its reasonable inferences in the light most
favorable to the Hanaways as we must do in reviewing the grant of summary
judgment, we find genuine issues of material fact that warrant submission of
this breach of contract claim to the factfinder. The evidence, if credited,
could support a finding that T. R. White orchestrated the sale of TPG’s assets
to PMP at a price that was below fair market value, that it did so for its own
benefit and that of the other limited partners, and to the financial detriment
of the Hanaways and TPG. The factfinder could reasonably find that this
conduct constituted a breach of T.R. White’s contractual duty to exercise its
discretion in the management of the limited partnership in good faith.
For the foregoing reasons, we affirm the grant of summary judgment
on the tort claims for conversion and breach of fiduciary duty based on the
statute of limitations. The Hanaways’ claim that the trial court erred in
dismissing their equity claims due to laches is waived since they failed to file
____________________________________________
12
T.R. White secured an appraisal of the value of the Davis and Loue tracts
in fee simple. As of the date of the sale, the tracts were appraised at
$2,700,000. PMP purchased the Davis Tract and the option for the Loue
Tract for $1.9 million and spent $800,000 to exercise the option to purchase
the Loue Tract.
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a post-trial motion pursuant to Pa.R.C.P. 227.1. However, we reverse the
grant of summary judgment on the contract claim for breach of the implied
covenant of good faith and fair dealing as to T.R. White, and remand for
further proceedings on that claim.
Judgment affirmed in part and reversed in part. Case remanded for
further proceedings consistent with this opinion. Jurisdiction relinquished.
Judge Stabile joins this Opinion.
Judge Donohue files a Concurring and Dissenting Opinion.
Judgment Entered.
Joseph D. Seletyn, Esq.
Prothonotary
Date: 12/15/2015
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