MBC Development, LP v. Miller, J. ( 2022 )

J-S10041-22
2022 PA Super 141MBC DEVELOPMENT, LP, MBC : IN THE SUPERIOR COURT OF
MANAGEMENT, LLC, MBC : PENNSYLVANIA
PROPERTIES, LP, JAMES L. MILLER, :
MILLER PROPERTIES MANAGEMENT, :
LLC, MARTIN CERULLO, WILLIAM :
KIRWAN :
:
:
v. : No. 1295 MDA 2021
:
:
JAMES W. MILLER :
:
Appellant :
Appeal from the Order Entered September 28, 2021
In the Court of Common Pleas of Schuylkill County Civil Division at
No(s): S-797-2021
BEFORE: MURRAY, J., McLAUGHLIN, J., and COLINS, J.*
OPINION BY COLINS, J.: FILED: AUGUST 12, 2022
This is an appeal from an order of the Court of Common Pleas of
Schuylkill County (trial court) permanently staying an arbitration initiated by
Appellant, James W. Miller, against MBC Development, LP, MBC Properties,
LP, MBC Management, LLC, Miller Properties Management, LLC, James L. Miller
(JLM), Martin Cerullo, and William Kirwan. For the reasons set forth below,
we vacate the trial court’s order insofar as it stayed Appellant’s arbitration in
its entirety, but affirm the stay of the arbitration with respect to appellees
Cerullo and Kirwan.
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* Retired Senior Judge assigned to the Superior Court.
J-S10041-22
Appellant and JLM, who is Appellant’s father, are limited partners in MBC
Development, LP and MBC Properties, LP (collectively, the Partnerships). N.T.
Oral Argument of Motion to Stay Arbitration (N.T. Oral Argument) at 3. MBC
Properties, LP is a Pennsylvania limited partnership founded in the 1970s by
JLM and JLM’s brother. Trial Court Opinion at 2. MBC Development, LP is a
Pennsylvania limited partnership founded in 2002 by JLM and Appellant. Id.Miller Properties Management, LLC and MBC Management, LLC (collectively,
the LLCs) are the respective general partners of MBC Properties, LP and MBC
Development, LP. N.T. Oral Argument at 3; 2/28/20 Report of Special
Litigation Committee Investigating Potential Claims on Behalf of MBC
Properties, LP, MBC Development, LP, MBC Grings Hill, LP, MBC Danville, LP,
MBC Carlisle, LP, and MBC Hamburg LLC (SLC Report) at 6-7. JLM owns more
than fifty percent of each of the Partnerships and more than 99% of each of
the LLCs. Id.The partnership agreements of the Partnerships (the Partnership
Agreements) both contain the following arbitration clause:
Section 11.1 Mandatory Arbitration
A. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively
by arbitration in accordance with the rules of the American
Arbitration Association in effect at the time of submission to
arbitration. Each Partner consents for himself or itself, and
for his or its respective successors in interest, to the
submission of any dispute or controversy hereunder to the
arbitration process as aforesaid, where such submission is
initiated by any other Partner (or that Partner’s successor in
interest). The arbitration shall be conducted by a single arbitrator
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selected by the parties or, if they cannot agree, then the arbitrator
or arbitrators shall be selected under the procedures of the
American Arbitration Association.
B. All decisions of the arbitrator shall be final, binding and
conclusive on all Partners (including any decision with regard
to costs as set out below in Section 11.2, and no Partner (and
no successor in interest) shall have a right of appeal from
any such decision to any Court. However, solely for the
purpose of implementing the arbitrator’s decision, judgment may
be entered on the arbitrator’s award in any court having
jurisdiction.
MBC Properties, LP Partnership Agreement at 26 § 11.1 (emphasis added);
MBC Development, LP Partnership Agreement at 23 § 11.1 (emphasis added)
On July 16, 2019 and August 12, 2019, Appellant served written
demands on the Partnerships and other entities not involved in this case
asking that they bring legal actions against JLM. Trial Court Opinion at 2;
2/28/20 SLC Report at 1. In response to these demands, the Partnerships
and other entities invoked the special litigation committee process provided
by Section 8694 of the Pennsylvania Uniform Limited Partnership Act of 2016
(the Limited Partnership Act), 15 Pa.C.S. § 8694, and appointed Cerullo and
Kirwan as a special litigation committee (the SLC) to investigate and address
the claims asserted in Appellant’s demands.1 Trial Court Opinion at 2; 2/28/20
SLC Report at 1. On February 28, 2020 and August 31, 2020, the SLC issued
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1 Although Section 8694 and the other provisions of the Limited Partnership
Act did not become law until long after the Partnership Agreements were
executed, they apply to all Pennsylvania limited partnerships, including those
formed before these statutes were enacted. 15 Pa.C.S. § 8611(c).
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reports addressing Appellant’s July and August 2019 demands and subsequent
demands submitted by Appellant. Trial Court Opinion at 2-3. In these reports,
the SLC directed that the Partnerships take certain actions to address issues
raised in Appellant’s demands, but concluded that no suit should be brought
against JLM. Id. at 3; 2/28/20 SLC Report at 41-48. Following the SLC’s
February 28, 2020 report, the parties entered into an agreement tolling the
statute of limitations on the claims in Appellant’s demands from February 28,
2020 through April 24, 2021.
On May 17, 2021, Appellant filed a demand for arbitration against the
Partnerships, the LLCs, JLM, Cerullo, and Kirwan (collectively, Appellees)
asserting derivative claims on behalf of the Partnerships against JLM for
breach of the fiduciary duty that the general partner owes to the Partnerships
and a direct claim against MBC Development, LP for failure to make a
mandatory distribution to him. On June 2, 2021, Appellees filed a petition to
permanently stay arbitration. In this petition, Appellees sought to stay the
arbitration in toto on the ground that Appellant’s claims are challenges to the
SLC determinations under Section 8694 of the Limited Partnership Act, not
claims arising under or in connection with the Partnership Agreements, and
on the ground that Section 8694 requires that a court determine whether a
special litigation committee’s determination bars a derivative action.
Appellees also sought, in the alternative, to permanently stay the arbitration
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as to Cerullo and Kirwan on the ground that they were not parties to any
agreement to arbitrate.
Following briefing and oral argument, the trial court on September 28,
2021 issued an order permanently staying the arbitration. The trial court
concluded that Appellant’s derivative claims were within the scope of the
Partnership Agreements’ arbitration clauses, but held that Appellant could not
proceed with the arbitration because the issue of whether the SLC’s
determination barred Appellant from bringing the derivative claims was a
statutory claim that was not within the scope of the arbitration clauses and
because the Limited Partnership Act requires that a court determine whether
a special litigation committee’s rejection of derivative claims must be
enforced. Trial Court Opinion at 5-12. The trial court also concluded that
Cerullo and Kirwan could not be compelled to arbitrate because they were not
parties to the Partnership Agreements and never consented to arbitration. Id.
at 12. This timely appeal followed.
Appellant presents the following issues for our review:
A. Did the trial court commit an error of law or abuse its discretion
by ordering a permanent stay of the arbitration initiated by
Appellant based on its interpretation of the Pennsylvania
Limited Partnership Act, 15 Pa. C.S. §8601, et seq., and in
particular sections 8615, 8692 and 8694, as requiring “court
review” of determinations of a special litigation committee even
when the parties have chosen arbitration as the exclusive and
mandatory forum for any dispute or controversy arising under
or in connections [sic] with the Partnership Agreement?
B. Did the trial court commit an error of law in finding that
Appellees Martin Cerullo and William Kirwan, as members of
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the special litigation committee appointed as agents acting on
behalf of the Partnerships, could not be bound to the arbitration
clause in the Partnership Agreements?
Appellant’s Brief at 5-6 (suggested answers omitted).
Both Pennsylvania and federal law impose a strong public policy in favor
of enforcing arbitration agreements. Marmet Health Care Center, Inc. v.
Brown, 565 U.S. 530, 532-33 (2012); Moses H. Cone Memorial Hospital
v. Mercury Construction Corp., 460 U.S. 1, 24 (1983); In re Estate of
Atkinson, 231 A.3d 891, 898 (Pa. Super. 2020); Saltzman v. Thomas
Jefferson University Hospitals, Inc., 166 A.3d 465, 471 (Pa. Super. 2017).
If a valid agreement to arbitrate exists and the dispute falls within the scope
of the arbitration agreement, the dispute must be submitted to arbitration and
a lower court’s denial of arbitration must be reversed. Estate of Atkinson,
231 A.3d at 898; Saltzman, 166 A.3d at 472; Provenzano v. Ohio Valley
General Hospital, 121 A.3d 1085, 1094, 1104 (Pa. Super. 2015); see also
42 Pa.C.S. §§ 7304(b), 7321.8(b), 7342(a).
We therefore employ a two-part test to determine whether the trial court
erred in granting Appellees’ petition to stay the arbitration: we determine 1)
whether a valid agreement to arbitrate exists and 2) whether the dispute is
within the scope of that agreement to arbitrate. Pittsburgh Logistics
Systems, Inc. v. B. Keppel Trucking, LLC, 153 A.3d 1091, 1093 (Pa.
Super. 2017); Ross Development Co. v. Advanced Building
Development, Inc., 803 A.2d 194, 196-97, 199 (Pa. Super. 2002); see also
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Saltzman, 166 A.3d at 472. Whether a written contract includes an
arbitration agreement and whether the parties’ dispute is within the scope of
the arbitration agreement are questions of law subject to this Court’s plenary
review. Estate of Atkinson, 231 A.3d at 898; Provenzano, 121 A.3d at
1095.
Applying these standards, we conclude that Appellant’s first issue is
meritorious and that the trial court erred in staying the arbitration in its
entirety. It is undisputed that both of the Partnership Agreements contain
valid arbitration clauses. Trial Court Opinion at 5; MBC Properties, LP
Partnership Agreement at 26 § 11.1; MBC Development, LP Partnership
Agreement at 23 § 11.1; 2/28/20 SLC Report at 14 (stating that “[t]he parties
do not dispute the validity of the relevant agreements containing the
arbitration agreements”). The Appellees other than Cerullo and Kirwan are
parties to one or both of the Partnership Agreements and the Partnerships,
the LLCs and JLM are bound by the arbitration agreements in the partnership
agreement or agreements to which they are parties. N.T. Oral Argument at
4; 2/28/20 SLC Report at 14. See also 15 Pa.C.S. § 8616(a), (b) (a limited
partnership and all of its partners are bound by the limited partnership’s
partnership agreement regardless of whether they signed the partnership
agreement).
In addition, it is clear that Appellant’s derivative claims are within the
scope of those arbitration agreements. The Partnership Agreements’
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arbitration clauses each provide that “[a]ny dispute or controversy arising
under or in connection with this Agreement shall be settled exclusively by
arbitration.” MBC Properties, LP Partnership Agreement at 26 § 11.1(A); MBC
Development, LP Partnership Agreement at 23 § 11.1(A). The derivative
claims that Appellant seeks to arbitrate are claims for breach of the general
partner’s fiduciary duty to the partnership. Arbitration Demand at 1-3, 5-7,
16-17, 20-21, 25, 28, 31-32, 35-42. Such claims are plainly disputes “arising
under or in connection with” the Partnership Agreements, as the general
partner’s duties to the Partnerships arise under and are governed by the
Partnership Agreements. MBC Properties, LP Partnership Agreement at 11-12
§4.4; MBC Development, LP Partnership Agreement at 10-11 §4.4.
The fact that these are derivative claims does not remove them from
the scope of the Partnership Agreement’s arbitration clauses. The comments
to the Limited Partnership Act recognize that derivative actions may be subject
to arbitration. 15 Pa.C.S. § 8615, comment to subsection (c)(17) (partnership
agreement may require arbitration of derivative claims). Although there is no
Pennsylvania precedent on this issue,2 courts in other jurisdictions have held
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2 Although Gardner v. Vascular Access Centers, LLC, 2113 EDA 2018 (Pa.
Super. April 22, 2019) (unpublished memorandum), relied on by both the trial
court and Appellees, involved refusal to compel arbitration of a derivative
action, it does not address the arbitrability of derivative actions at all.
Rather, the Court in Gardner held only that the derivative action there was
not arbitrable because the claims that it asserted arose under a contract that
did not contain an arbitration clause and not under the agreement that had
(Footnote Continued Next Page)
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that derivative claims that assert rights within the scope of the parties’
arbitration agreement are subject to arbitration. See, e.g., Elf Atochem
North America, Inc. v. Jaffari, 727 A.2d 286, 293-96 (Del. 1999); M.D.
Building Material Co. v. 910 Construction Venture, 579 N.E.2d 1059,
1063-64 (Ill. App. 1991); Maresca v. La Certosa, 569 N.Y.S.2d 111, 111-
12 (N.Y. App. Div. 1991); Sasaki v. McKinnon, 707 N.E.2d 9, 12 (Ohio App.
1997), app. dismissed, 703 N.E.2d 321 (Ohio 1998). Indeed, both the trial
court and the SLC concluded that the derivative claims that Appellant asserts
in his arbitration demand are within the scope of the arbitration agreements.
Trial Court Opinion at 12; 2/28/20 SLC Report at 14.
The trial court, however, held, and Appellees argue, that Appellant’s
arbitration demand falls outside the scope of the Partnership Agreement
arbitration clauses because, in their view, the challenge to the SLC’s
determination is a distinct statutory cause of action under Section 8694 that
does not arise from the Partnership Agreements. This premise is erroneous.
Sections 8692 and 8694 of the Limited Partnership Act do not set forth
a cause of action that a partner in a limited partnership may assert; they set
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the arbitration clause. Slip op. at 6-8. Moreover, as an unpublished decision
of this Court prior to May 2, 2019, Gardner cannot be relied upon, even for
its persuasive value. Pa.R.A.P. 126(b); 210 Pa. Code § 65.37(B). For that
latter reason, we also do not rely on Etzler v. Etzler, 2288 EDA 2014 (Pa.
Super. November 17, 2015) (unpublished memorandum), which did address
this issue and held, as we do here, that derivative claims that assert rights
governed by an agreement that contains an arbitration clause are subject to
arbitration.
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forth prerequisites to and limitations on a partner’s assertion of derivative
claims on behalf of the limited partnership. Section 8692 provides that
a partner may maintain a derivative action to enforce a
right of a limited partnership only if:
(1) the partner first makes a demand on the general partners
requesting that they cause the partnership to bring an action to
enforce the right, and:
(i) if a special litigation committee is not appointed under section
8694 (relating to special litigation committee), the partnership
does not bring the action within a reasonable time; or
(ii) if a special litigation committee is appointed under section
8694, a determination is made:
(A) under section 8694(e)(1) that the partnership not object to
the action; or
(B) under section 8694(e)(5)(i) that the plaintiff continue the
action;
(2) demand is excused under subsection (b);
(3) the action is maintained for the limited purpose of seeking
court review under section 8694(f); or
(4) the court has allowed the action to continue under the control
of the plaintiff under section 8694(f)(3)(ii).
15 Pa.C.S. § 8692 (emphasis added). Section 8694 sets forth the procedures
governing special litigation committees and the circumstances under which
derivative claims may be litigated following a special litigation committee’s
determination. 15 Pa.C.S. §8694(a)-(f). Nothing in Section 8694 provides a
cause of action that a partner may bring. Rather, what it provides is a method
by which the limited partnership can make an independent decision whether
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to pursue litigation against a controlling party. 15 Pa.C.S. §8694(a)-(e).
Subsection 8684(f), on which the trial court and Appellees rely, sets forth
when that independent decision bars a derivative claim and when the
derivative claim may proceed. 15 Pa.C.S. §8694(f).
Whether a prerequisite or limitation bars a claim that is within the scope
of a valid arbitration agreement is a question that must be resolved by the
arbitrator, not an additional requirement for arbitration that a court may be
determine before allowing arbitration to proceed. TTSP Corp. v. Rose Corp.,
217 A.3d 1269, 1281-82 (Pa. Super. 2019); Theodore C. Willis Co. v.
School District of Boyertown Area, 837 A.2d 1186, 1189 (Pa. Super.
2003); Ross Development Co., 803 A.2d at 196-99.
[T]he determination of whether [a] matter is subject to arbitration
is within the jurisdiction of the trial court. However, not all
questions are to be resolved by the trial court. In a proceeding to
stay or to compel arbitration, the question of whether the parties
agreed to arbitrate, commonly referred to as “substantive
arbitrability,” is generally one for the courts and not for the
arbitrators. On the other hand, resolution of procedural questions,
including whether the invocation of arbitration was proper or
timely is left to the arbitrator. … [I]f it appears that a dispute
relates to a contract’s subject matter and the parties
agreed to arbitrate, all issues of interpretation and
procedure, including requirements preliminary to the
presentation of any claims, are for the arbitrators to
resolve.
Ross Development Co., 803 A.2d at 196, 198 (citations omitted) (emphasis
added). The merits of defenses that do not involve the existence or scope of
the arbitration agreement must be determined by the arbitrator, not the court.
Andrew v. CUNA Brokerage Services, Inc., 976 A.2d 496, 502 (Pa. Super.
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2009); Highmark Inc. v. Hospital Service Association of Northeastern
Pennsylvania, 785 A.2d 93, 100-02 (Pa. Super. 2001). The fact that a
defense or restriction on the arbitrable claim is statutory, rather than based
on the language of the parties’ agreement, does not change the fact that it
must be determined by the arbitrator and not by the court. Andrew, 976
A.2d at 502 (whether claim is barred by statute of limitations is for arbitrator
to decide); Woodward Heating & Air Conditioning Co. v. American
Arbitration Association, 393 A.2d 917, 920 n.4 (Pa. Super. 1978) (same).
The trial court also held and Appellees argue that the references in the
Limited Partnership Act to “court review,” filing with “the court,” and “the
court” making a determination concerning the special legal committee and its
investigation, 15 Pa.C.S. § 8692(a)(3), (4); 15 Pa.C.S. § 8694(f), require that
a court of common pleas, rather than an arbitrator, make the determination
that the derivative action may proceed. This reasoning likewise is legally
invalid.
Reference to a court as an adjudicator in a statute that applies to the
plaintiff’s claim does not require that only a court can make such an
adjudication or prohibit arbitration of the claim or issue. Saltzman, 166 A.3d
at 474 (reference to “court” in Whistleblower Law did not exclude
Whistleblower claims from arbitration); Provenzano, 121 A.3d at 1099-1103
(fact that Wage Payment and Collection Law (WPCL) provided that actions
“may be maintained in any court of competent jurisdiction” and that “[t]he
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court” shall award certain relief did not preclude arbitration of WPCL claim that
was within scope of arbitration agreement). Here, Sections 8692 and 8694
do not state that courts have exclusive jurisdiction over proceedings
concerning the effect of a special litigation committee determination on a
derivative claim. Rather, they simply refer to “the court” as the adjudicator
of the effect of a special litigation committee determination where the action
is brought in a court and refer to “court review” without any suggestion of
intent to bar other adjudicators from addressing the issue.
Moreover, no other provisions of the Limited Partnership Act suggest
that its references to a court as an adjudicator are intended to limit jurisdiction
to courts or bar arbitrators from deciding such matters. Although the term
“court” is defined as “the court of common pleas of the judicial district
embracing the county where the registered office of the [entity] is or is to be
located,” 15 Pa.C.S. § 102, comments to the Limited Partnership Act make
clear that this definition and the references that the Limited Partnership Act
makes to a “court” do not bar arbitrators from deciding issues where the
partnership agreement provides for arbitration. 15 Pa.C.S. § 8681, comment
to subsection (a)(6) (although subsection refers to an order of “the court”
dissolving the partnership, such dissolution may be by an arbitrator if the
partnership agreement provides for binding arbitration); 15 Pa.C.S. § 8615,
comment to subsection (c)(15) (same).
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Because there was a valid arbitration agreement binding on Appellant,
the Partnerships, the LLCs, and JLM, Appellant’s derivative claims were within
the scope of that arbitration agreement, and the determination required by
Section 8694 of the Limitation Partnership Act is a prerequisite and defense
to those claims, rather than a cause of action, the determination whether
Section 8694 permits Appellant to litigate his derivative claims is matter for
the arbitrator to determine, not ground for denying or staying arbitration.
TTSP Corp., 217 A.3d at 1281-82; Theodore C. Willis Co., 837 A.2d at
1189; Ross Development Co., 803 A.2d at 196-99; Highmark Inc., 785
A.2d at 100-02. The trial court therefore erred in granting the petition of the
Partnerships, the LLCs, and JLM to stay the arbitration of Appellant’s derivative
claims.
The trial court, however, did not err in granting a stay of arbitration as
to appellees Cerullo and Kirwan. Cerullo and Kirwan were not parties to either
of the partnership agreements that provided for arbitration. Generally, only
parties to an arbitration agreement can be compelled to arbitrate a dispute.
Humphrey v. GlaxoSmithKline PLC, 263 A.3d 8, 14 (Pa. Super. 2021);
Civan v. Windermere Farms, Inc., 180 A.3d 489, 494-95 (Pa. Super.
2018); Elwyn v. DeLuca, 48 A.3d 457, 461 (Pa. Super. 2012). While third-
party beneficiaries of a contract that contains an arbitration agreement may
be subject to arbitration of their claims under that contract, Civan, 180 A.3d
at 494; Highmark Inc., 785 A.2d at 99, Cerullo and Kirwan are not third-
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party beneficiaries of the Partnership Agreements and assert no rights under
those agreements.
Appellant argues that Cerullo and Kirwan are bound by the Partnership
Agreements’ arbitration clauses because they were appointed agents of the
Partnerships. This argument fails for two reasons. First, mere status as agent
of an entity that is bound by an arbitration agreement is insufficient to compel
a person to arbitrate over his objection. Humphrey, 263 A.3d at 15-18.
Second, Cerullo and Kirwan’s acts on behalf of the Partnerships were not under
the Partnership Agreements and did not involve any duties or obligations
governed by the Partnership Agreements. Any claim against them therefore
is not within the scope of the arbitration agreements because it is not a
“dispute or controversy arising under or in connection with [the Partnership
Agreements].” MBC Properties, LP Partnership Agreement at 26 § 11.1(A);
MBC Development, LP Partnership Agreement at 23 § 11.1(A).
For the foregoing reasons, we conclude that the trial court erred in
holding that Appellant’s claims against the Partnerships, the LLCs, and JLM
are not subject to arbitration, but that it correctly ruled that Cerullo and
Kirwan could not be compelled to arbitrate. Accordingly, we vacate its order
insofar as it permanently stayed Appellant’s arbitration in its entirety and
affirm its order only insofar as it stayed arbitration of claims against Cerullo
and Kirwan.
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Order vacated in part and affirmed in part. Case remanded. Jurisdiction
relinquished.
Judgment Entered.
Joseph D. Seletyn, Esq.
Prothonotary
Date: 8/12/2022
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