Hanaway, L. v. The Parkesburg Group

• Court: Superior Court of Pennsylvania
• Decided: December 15, 2015
• Docket: 2564 EDA 2014
• Status: Published

Opinion

J-A09004-15

2015 PA Super 263

LYNN 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 J-A09004-15

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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