Hanaway, L. v. The Parkesburg Group ( 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,
Court of Common Pleas, Chester County,
Civil Division at No. 2011-01522
BEFORE: BOWES, DONOHUE and STABILE, JJ.
CONCURRING AND DISSENTING OPINION BY DONOHUE, J.:
FILED DECEMBER 15, 2015
I agree with the learned Majority’s determinations with respect to the
first four issues raised by Appellants on appeal. I respectfully dissent from
the Majority’s decision on Appellants’ fifth issue on appeal, as I disagree that
an implied covenant of good faith and fair dealing provides the Appellants
with a cause of action for breach of contract in this case. The two limited
partnership agreements at issue here gave the general partner, T.R. White,
Inc. (“TRW”), “full, exclusive and complete discretion” over the management
and control of Sadsbury Associates, L.P. (“SA”) and The Parkesburg Group,
L.P. (“TPG”). The Appellants contend that TRW did not exercise this
discretion in good faith, and thus, they should be entitled to sue for breach
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of contract. Acknowledging that this case presents “a novel question under
Pennsylvania law,” the Majority recommends that we adopt Delaware law on
this issue and hold that TRW breached implied covenants of good faith and
fair dealing the SA and TPG limited partnership agreements. Maj. Op. at 22-
27.
I disagree for three reasons. First, the decision to adopt Delaware law
is unwarranted in this circumstance, as there is an important difference
between the statutes governing limited partnerships in the two states.
Second, even if a duty of good faith and fair dealing may be implied in
Pennsylvania limited partnership agreements, this is not a proper case in
which to do so. The SA and TPG limited partnership agreements
exhaustively set forth the applicable restrictions on TRW’s management
discretion, leaving no room (or need) for implied contractual terms. Finally,
Appellants had available remedies sounding in both contract and tort, but
chose not to litigate the breach of contract claim pled in their complaint and
failed to file their complaint in time to preserve their tort claims. This Court
should not recognize a new cause of action merely because the Appellants
failed to prosecute the tort and contract claims available to them in response
to TRW’s alleged conduct.
Pennsylvania appellate courts have recognized an implied duty of good
faith and fair dealing only in contracts regulating certain types of legal
relationships. Cable & Associates Ins. Agency, Inc. v. Commercial Nat.
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Bank of Pennsylvania, 875 A.2d 361, 364 (Pa. Super. 2005). While this
Court has recognized an implied duty of good faith and fair dealing in
contracts between franchisors and their franchisees and between insurers
and their insureds, no such duty exists in contracts between lenders and
borrowers. Creeger Brick & Bldg. Supply, Inc. v. Mid-State Bank and
Trust, 560 A.2d 151, 153-54 (citing Atlantic Richfield Co. v. Razumic,
390 A.2d 736 (Pa. 1978), Loos & Dilworth v. Quaker State Oil Refining
Corp., 500 A.2d 1155 (Pa. Super. 1985), Gray v. Nationwide Mutual Ins.
Co., 223 A.2d 8 (Pa. 1966), Gedeon v. State Farm Ins. Co., 188 A.2d 320(Pa. 1963), and Heights v. Citizens National Bank, 342 A.2d 738 (Pa.
1975)); see also Heritage Surveyors & Engineers, Inc. v. Nat'l Penn
Bank, 801 A.2d 1248, 1253 (Pa. Super. 2002). The Pennsylvania
Legislature has required recognition of a duty of good faith and fair dealing
in just one context - commercial contracts. 13 Pa.C.S.A. § 1304. A duty of
good faith and fair dealing exists in every commercial contract, and the
legislature has deemed this duty so important that the parties to the
contract are prohibited from varying or limiting its obligations. 13 Pa.C.S.A.
§ 1302(b).
Neither the Pennsylvania Legislature nor any Pennsylvania appellate
court has ever addressed whether an implied duty of good faith and fair
dealing exists in limited partnership agreements. As a result, the Majority
directs us to two decisions from the Supreme Court of Delaware, Winshall
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v. Viacom Int'l, Inc., 76 A.3d 808 (Del. 2013), and Gerber v. Enter.
Products Holdings, LLC, 67 A.3d 400, 419 (Del. 2013) (overruled on other
grounds in Winshall). In these two cases, the Delaware court held that an
implied covenant of good faith and fair dealing exists in every Delaware
limited partnership agreement. Winshall, 76 A.3d at 1260; Gerber, 67
A.3d at 419. This implied covenant affords limited partners “contractual
protections ‘they failed to secure for themselves at the bargaining table,’”
and “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.” Winshall, 76 A.3d at
1260; Gerber, 67 A.3d at 419. When confronted with a claim for breach of
an implied covenant of good faith and fair dealing, Delaware courts must
therefore determine whether the general partner exercised its management
discretion “reasonably,” or if instead the general partner frustrated the
“reasonable expectations” of the limited partners by denying them the fruits
of their contractual bargain. Maj. Op. at 25.
Limited partnerships are creatures of the legislature. Northampton
Vly. Constr. v. Horne-Lang Assoc., 456 A.2d 1077, 1078 (Pa. Super.
1983). While a limited partnership agreement is a contract, it is a unique
form of contract in that its terms must conform to the statutory structure for
limited partnerships established by the state legislature. To form a limited
partnership in Delaware, the terms of the limited partnership agreement
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must conform to the legislative directives of the Delaware Revised Uniform
Limited Partnership Act (“DRULPA”), 6 Del. C. §§ 17-101 - 1111, whereas
the governing statute in Pennsylvania is the Pennsylvania Revised Uniform
Limited Partnership Act (“PRULPA”), 15 Pa.C.S.A. §§ 8501 - 8594. The
rights, duties, and liabilities of the partners in a limited partnership formed
in these states are governed, first and foremost, by these legislative acts.
With respect to implied covenants of good faith and fair dealing, the
DRULPA and the PRULPA contain an important difference. Each state
adopted its own version of the Revised Uniform Limited Partnership Act of
1976, Delaware in 1982 and Pennsylvania in 1988. The 1976 uniform act
contained no reference to a implied duty of good faith and fair dealing, and
thus, at the times of enactment, neither the DRUPLA nor the PRUPLA did
either.1 In 2001, a new uniform act (the Uniform Limited Partnership Act of
2001) was published, which for the first time included provisions indicating
that partners to a limited partnership agreement owe each other an implied
duty of good faith and fair dealing. See UNIF. LTD. PART. ACT §§ 305(b),
408(d), 110(b)(7) (2001). Neither Delaware nor Pennsylvania adopted the
1
Since their enactments, the DRULPA and the PRULPA have contained one
unrelated reference to “good faith,” specifically, a provision permitting the
general partner to keep certain types of information (e.g., trade secrets)
confidential from the limited partners if the general partner believes, in good
faith, that disclosure could damage the limited partnership. 6 Del. C. § 17-
305(b); 15 Pa.C.S.A. § 8525(b). This provision was not patterned after any
section in the 1976 uniform legislation. Pennsylvania patterned its provision
after Delaware’s section 17-305(b). 15 Pa.C.S.A. § 8525(b) Source Note-
1988.
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2001 uniform legislation in toto, but in 2004 the Delaware legislature
amended the DRULPA to add three new provisions, codified at 6 Del. C. §17-
1101(d)–(f),2 that expressly recognize that a general partner in a Delaware
2
§ 17-1101. Construction and application of chapter and
partnership agreement
* * *
(d) To the extent that, at law or in equity, a partner
or other person has duties (including fiduciary
duties) to a limited partnership or to another partner
or to another person that is a party to or is otherwise
bound by a partnership agreement, the partner's or
other person’s duties may be expanded or restricted
or eliminated by provisions in the partnership
agreement; provided that the partnership agreement
may not eliminate the implied contractual covenant
of good faith and fair dealing.
(e) Unless otherwise provided in a partnership
agreement, a partner or other person shall not be
liable to a limited partnership or to another partner
or to another person that is a party to or is otherwise
bound by a partnership agreement for breach of
fiduciary duty for the partner’s or other person's
good faith reliance on the provisions of the
partnership agreement.
(f) A partnership agreement may provide for the
limitation or elimination of any and all liabilities for
breach of contract and breach of duties (including
fiduciary duties) of a partner or other person to a
limited partnership or to another partner or to
another person that is a party to or is otherwise
bound by a partnership agreement; provided, that a
partnership agreement may not limit or eliminate
liability for any act or omission that constitutes a bad
faith violation of the implied contractual covenant of
good faith and fair dealing.
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limited partnership owes the limited partners an implied duty of good faith
and fair dealing. 6 Del. C. § 17-1101(d)–(f). These provisions further
specify that while the partners may, if they so choose when drafting their
limited partnership agreement, modify or remove a general partner’s liability
for a breach of fiduciary duty, they may not, in any circumstance, “limit or
eliminate liability for any act or omission that constitutes a bad faith
violation of the implied contractual covenant of good faith and fair dealing.”
6 Del. C. § 17-1101(f).
The Pennsylvania Legislature has never similarly amended the PRULPA
to recognize an implied duty of good faith and fair dealing in Pennsylvania
limited partnership agreements, and the PRULPA has no counterparts to
sections 17-1101(d)-(f) in the DRULPA. Instead, quite to the contrary,
under the PRULPA the parties have essentially unlimited freedom of contract
to regulate their own internal affairs:
§ 8520. Partnership agreement
* * *
(d) Freedom of contract.--A written partnership
agreement may contain any provision for the
regulation of the internal affairs of the limited
partnership agreed to by the partners, whether or
not specifically authorized by or in contravention of
this chapter….
6 Del. C. § 17-1101(d)-(f).
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15 Pa.C.S.A. § 8520(d).3 While general partners in Pennsylvania owe
fiduciary duties to the limited partners, 15 Pa.C.S.A. §§ 8520, 8533, 8504,
8334, under section 8520(d) presumably the partners could eliminate even
these obligations in the limited partnership agreement.
For these reasons, I cannot agree with the Majority’s decision to adopt
Delaware law on this issue. In a Delaware limited partnership, when a
general partner exercises its discretion in management decisions, the
Delaware legislature mandates that it do so, in all instances and without
exception, subject to an implied covenant of good faith and fair dealing. In
significant contrast, there has been no like mandate by the Pennsylvania
Legislature, which has placed no similar restriction on a general partner’s
exercise of its discretion. Instead, pursuant to section 8520(d), the parties
to a Pennsylvania limited partnership agreement may establish their own
unique limitations on the general partner’s conduct (or choose not to limit it
at all).
In the present case, pursuant to section 8520(d), the parties to the SA
and TPG limited partnership agreements (including the Appellants)
thoroughly described both the nature of TRW’s management powers and the
corresponding restrictions on those powers. In identical language in both
agreements, section 6.2 provides TRW with “full, exclusive and complete
3
The provision lists two exceptions to this general rule, but neither has any
application to this case.
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discretion in the management and control of the business of the
Partnership,” and section 6.5.1 further authorizes TRW, at its “sole and
absolute discretion,” to cause SA and/or TPG to enter into “any contract,
amendment, supplement or other document relating to the Business.”
Motion for Partial Summary Judgment, 2/7/2011, Exhibits 4 and 5. Section
6.2 requires TRW to exercise its powers in a manner that is “consistent with
the Business of the Partnership,” and sections 2.1 and 2.2 define the
“Business of the Partnership” to be real estate investment and development.
Id. Finally, section 6.9 provides that TRW may not be held liable “in
damages or otherwise” to the limited partnership or to any limited partner,
“unless such act or failure to act is attributable to willful misconduct, gross
negligence, fraud or an intentional violation of any term of this Agreement.”
Id.
Pennsylvania courts will not imply terms inconsistent with the express
terms adopted by the parties to the contract. See, e.g., Hutchison v.
Sunbeam Coal Corp., 519 A.2d 385, 388 (Pa. 1986) (A court may “not
imply a different contract than that which the parties have expressly
adopted.”); John B. Conomos, Inc. v. Sun Co. (R&M), 831 A.2d 696,
706-07 (Pa. Super. 2003) (“[U]nequivocal contractual terms hold a position
superior to any implied by courts, leaving implied covenants to serve as gap
filler.”); Greek v. Wylie, 109 A. 529, 530 (Pa. 1920) (“[T]here can be no
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implied covenants as to any matter specifically covered by the written terms
of the contract itself.”).
The Appellants offer no reason why we should imply a
“reasonableness” requirement of good faith into the SA and TPG limited
partnership agreements, since the express language of these contracts set
forth the particular limitations on TRW’s discretion in managing the business
of SA and TPG. TRW had an express contractual obligation to exercise its
management functions “consistent with the Business of the Partnership,”
namely, to take all actions necessary to invest in and develop the real estate
held by the limited partnerships, with an intentional violation of this
obligation constituting an actionable breach of contract.
The Appellants’ “reasonable expectations” of TRW need not be implied
into the SA and TPG limited partnership agreements, as the parties’ own
contractual language specified that TRW’s obligation was to invest in and
develop real estate to generate profits and/or capital appreciation for the
limited partners. So long as TRW’s actions remained consistent with this
goal, it had “full, exclusive and complete discretion” in making its
management decisions. An intentional failure to direct its efforts “consistent
with the Business of the Partnership,” however, subjected TRW to possible
civil liability for breach of contract. Instantly, there is no room (or need) to
add gap-fillers or to imply any terms “the parties would have agreed to
during their original negotiations if they had thought to address them,”
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Winshall, 76 A.3d at 1260. At the outset, the parties here (including the
Appellants) addressed both the limited partners’ “reasonable expectations”
for TRW’s conduct as well as TRW’s potential liability for an intentional
violation of those expectations.
The Appellants well understood this. In the first count (Breach of
Contract) of their Complaint, the Appellants did not allege that TRW violated
any implied duties of good faith. Rather, the Appellants pled that TRW
breached its contractual obligations to carry out its duties consistently with
the “Business of the Partnership,” i.e., to develop the real estate held by
TPG and SA and, in so doing, to generate “profits and/or capital
appreciation” for the limited partners. Complaint, 2/11/2011, ¶¶ 64-69.
Specifically, the Appellants alleged:
67. The actions of TRW as described above in
transferring the Davis Tract and the Loue Tract to
PMP for less than adequate consideration and using
the funds of [SA] for PMP to acquire these
properties, constitute a deliberate and intentional
breach of the contractual obligation of TPG and SA to
pay [Appellants] their respective share of the profits
and/or capital appreciation in the value of the assets
of both these Partnerships, all in violation of the TPG
and SA Agreements.
68. TRW, TPG and [SA] have failed and
refused and continue to fail and refuse to pay
[Appellants] the full profits they should receive from
the sale of the real estate and/or the townhouses to
be constructed thereon, or in the alternative, the
value of the appreciation in the assets of TPG or the
full value of the monies transferred from [SA].
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Id. ¶¶ 67-68.
For reasons unclear from the certified record on appeal, the Appellants
abandoned their claim that TRW breached the express terms of the limited
partnership agreements, as in their response to the motion for summary
judgment, the Appellants argued only that TRW breached an implied duty of
good faith and fair dealing. Moreover, the Appellants asserted various tort
claims, including breach of fiduciary duty and conversion, for the same
allegedly wrongful conduct that underlies their claim for breach contract.
Complaint, 2/11/2011, ¶¶ 70-77. As explained in the portion of the Majority
opinion with which I join, the Appellants did not preserve these causes of
action through the timely filing of their Complaint. Maj. Op. at 6-14. We
should not recognize a new cause of action (breach of an implied covenant
of good faith and fair dealing in a limited partnership agreement) merely
because the Appellants failed to prosecute the tort and contract claims
available to them in response to TRW’s alleged conduct.
For these reasons, I would affirm the trial court’s August 14, 2014
order in its entirety, and I thus dissent from the Majority’s opinion to the
extent that it fails to do so.
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