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Hanaway v. The Parkesburg Group, LP

Supreme Court of Pennsylvania

August 22, 2017

LYNN J. HANAWAY AND CONNIE HANAWAY, Appellees
v.
THE PARKESBURG GROUP, LP; PARKE MANSION PARTNERS, LP; SADSBURY ASSOCIATES, LP; PARKE MANSION, LLC; AND T.R. WHITE, INC., Appellants

          ARGUED: December 6, 2016

         Appeal from the Order of the Superior Court at No. 2564 EDA 2014, dated December 15, 2015, affirming in part and reversing in part the judgment of the Chester County Court of Common Pleas at No. 2011-01522, dated August 14, 2014, and remanding.

          SAYLOR, C.J., BAER, TODD, DONOHUE, DOUGHERTY, WECHT, MUNDY, JJ.

          OPINION

          WECHT JUSTICE.

         This case involves a dispute between partners of the Parkesburg Group, L.P. ("Parkesburg"), a Pennsylvania limited partnership. At issue is the applicability of the implied covenant of good faith and fair dealing to a limited partnership agreement formed pursuant to Pennsylvania's Revised Uniform Limited Partnership Act ("PRULPA").[1] The Superior Court reversed the trial court's order, which had granted partial summary judgment in favor of Parkesburg's general partner and against two of its limited partners. We reverse the Superior Court's order in relevant part, [2] and we hold that the implied covenant of good faith and fair dealing is inapplicable to the Pennsylvania limited partnership agreement at issue, which was formed well before the enactment of amendments that codified such a covenant.[3]

         On May 21, 1998, in order to pursue a real estate investment and development project, Lynn and Connie Hanaway, T.R. White, Inc. ("T.R. White"), and several others formed a limited partnership, Sadsbury Associates, L.P. ("Sadsbury"). The Hanaways were among several limited partners of Sadsbury, while T.R. White served as the general partner. Sadsbury profitably carried out its purpose.

         In 2002, acting independently from Sadsbury, T.R. White contracted for options to purchase two separate tracts of land. Specifically, in January 2002, T.R. White acquired an option to purchase, for $850, 000, a 43.2-acre parcel of unimproved land, hereinafter referred to as the "Davis Tract." On September 9, 2002, T.R. White obtained an option to purchase, for $800, 000, an adjacent 17-acre parcel of unimproved land, hereinafter referred to as the "Loue Tract."

         On October 14, 2005, prompted by the success of Sadsbury, the partners of Sadsbury formed Parkesburg in order to implement a new residential development project involving the Davis and Loue Tracts. T.R. White served as Parkesburg's general partner, and the Hanaways were among several limited partners.[4]Parkesburg's limited partnership agreement gave T.R. White broad discretion to carry out its duties. Pursuant to the express terms of the agreement, T.R. White, as the general partner, controlled "the business and affairs of the Partnership." Parkesburg Limited Partnership Agreement ¶6.1. The business of the partnership included "[r]eal [e]state investment and development" as well as "all other acts and things which may be necessary, incidental or convenient" to carry on the business of the partnership. Id. at ¶2.1. The agreement provided T.R. White with "full, exclusive and complete discretion in the management and control of the business of the Partnership[.]" Id. at ¶6.2. Additionally, T.R. White had the absolute right "to cause [Parkesburg] (i) to execute and deliver any contract, amendment, supplement or other document relating to the Business and (ii) subject to the terms of this Agreement, to exercise the rights and fulfill the obligations of the Partnership under the applicable law[.]" Id. at ¶6.5. The Agreement did not confer management authority on Parkesburg's limited partners.

         The parties referred to the Parkesburg development project as the Subdivision. In addition to developing the Davis and Loue Tracts, Parkesburg's plan for the Subdivision included an adjacent quarry, which the Hanaways owned. Parkesburg had acquired a $180, 000 option to purchase the quarry from the Hanaways. On May 6, 2006, Parkesburg acquired the option to purchase the Davis Tract. On July 11, 2006, Parkesburg exercised its option, purchasing the tract for $1, 024, 000.

         On February 21, 2007, the Hanaways informed T.R. White that the option to purchase the quarry from them had expired and that they were unwilling to include it in the Subdivision. They also refused to contribute any additional capital toward the project. This change of heart forced Parkesburg to restructure and obtain new approvals for a development plan that excluded the quarry. Because the Hanaways were unwilling to contribute additional capital to continue developing the Subdivision, the remaining limited partners became reluctant to contribute as well.[5] Lacking capital and financially restrained from proceeding, Parkesburg's development of the Subdivision stalled. With the option on the Loue Tract approaching its expiration date, T.R. White acted to save the development project and its investment. On September 25, 2007, T.R. White informed the Hanaways that, upon obtaining a third party fair market value appraisal, it intended to sell the Davis Tract and the option for the Loue Tract contemporaneously.

         The crux of this dispute concerns Parkesburg's sale of the Davis Tract and the Loue Tract option to a newly formed limited partnership, Parke Mansion Partners ("PMP"). With the exception of the Hanaways, all of Parkesburg's limited partners were also partners of PMP. On November 29, 2007, Parkesburg assigned the option to purchase the Loue Tract to PMP for $10. PMP subsequently exercised this option, purchasing the Loue Tract for $800, 000. On September 5, 2008, Parkesburg sold the Davis Tract to PMP for $1.9 million. Having purchased the Davis and Loue Tracts, PMP planned to continue developing the Subdivision without the Hanaways.

         On February 11, 2011, more than two years after PMP had purchased the disputed land from Parkesburg, the Hanaways commenced this litigation by filing a six-count complaint against T.R. White, PMP, Parkesburg, and Sadsbury. Of relevance, the Hanaways averred in Count I of their complaint that T.R. White transferred the Davis Tract and the Loue Tract option to PMP for less than adequate consideration and below fair market value as part of a scheme to eliminate the Hanaways' ownership interests. Specifically, the Hanaways alleged that T.R. White, as general partner, breached Parkesburg's limited partnership agreement. They viewed the sale of the Parkesburg tracts to PMP as a sham, executed to freeze them out of Parkesburg.

         T.R. White filed a motion for partial summary judgment, arguing that the Hanaways' breach of contract claim failed as a matter of law because the Hanaways did not identify a specific term of the Parkesburg limited partnership agreement that T.R. White had breached. See T.R. White's Motion for Partial Summary Judgment, 07/01/2013, ¶ 64. In response, the Hanaways expounded upon their initial breach of contract claim, contending that T.R. White had breached the implied covenant of good faith and fair dealing. See The Hanaways' Answer to Motion for Partial Summary Judgment, 8/06/2013, ¶46. The trial court granted summary judgment as to the contract claim, agreeing with T.R. White that the Hanaways had failed to identify a specific term of the limited partnership agreement that had been breached.[6] The trial court also observed that the Parkesburg limited partnership agreement unequivocally provided T.R. White, as the general partner, with complete and exclusive discretion to manage the partnership. According to the court, the implied covenant of good faith and fair dealing could not override such clear language. See Trial Court Order, 1/23/2014, at 3.

         The Hanaways appealed the trial court's order to the Superior Court. A divided panel of the Superior Court reversed the trial court's order granting partial summary judgment with respect to the contract claim, and concluded that T.R. White was obliged to discharge its duties under the limited partnership agreement in good faith. Hanaway v. Parkesburg Grp., L.P., 132 A.3d 461 (Pa. Super. 2015). The majority adopted the Restatement (Second) of Contracts Section 205[7] and, in doing so, considered several cases in which courts have applied the concept of good faith in the contract setting.[8] In light of its review of precedent, the Superior Court perceived no reason to treat limited partnership agreements differently than any other type of contract. The majority also opined that the Hanaways' breach of the covenant of good faith and fair dealing claim was a breach of contract action, not an independent action for breach of a duty of good faith.

         To bolster its holding, the Superior Court majority examined Delaware law, which recognizes an implied covenant of good faith and fair dealing with respect to limited partnership agreements formed pursuant to Delaware's Revised Uniform Limited Partnership Act ("DRULPA"). DEL. CODE title 6, 17-101-1111. The majority noted that DRULPA permits parties to a limited partnership agreement to contractually "expand, restrict, or eliminate any fiduciary duties that a person may owe." Hanaway, 132 A.3d at 473 (quoting DEL. CODE title 6, 17-1101(d)). The majority found it significant that DRULPA forbids contracting parties from waiving the implied covenant of good faith and fair dealing. To that end, the majority reasoned that, 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." Hanaway, 132 A.3d at 473. The Superior Court found a Delaware Supreme Court case persuasive, see Gerber v. Enterprise Products Holdings, L.L.C., and incorporated aspects of the Gerber court's analysis into its own opinion.[9] Drawing from Gerber, the Superior Court reasoned that, in this situation, as in Gerber and under Delaware law, parties to a limited partnership agreement owe a duty to exercise managerial discretion in good faith, a duty that cannot be eliminated contractually. The majority remanded the breach of contract claim to the trial court to consider whether T.R. White acted in bad faith in performing its managerial duties under the limited partnership agreement.

         From a dissenting posture, then-Judge, now Justice, Donohue opined that the implied covenant of good faith and fair dealing could not save the Hanaways' defective breach of contract claim. In her view, the implied covenant of good faith and fair dealing does not apply to limited partnership agreements because limited partnerships are unique "creatures of the legislature" that must comport with PRULPA. Hanaway, 132 A.3d at 477 (Donohue, J., dissenting). Then-Judge Donohue explained that "[t]he rights, duties, and liabilities of the partners in a limited partnership formed in [Pennsylvania and Delaware] are governed, first and foremost, by . . . legislative acts." Id.

         The dissent traced the evolution of both PRULPA and DRULPA, stressing the critical distinctions between the acts. Notably, the dissent emphasized that, at the relevant time, PRULPA, unlike DRULPA, prioritized contractual freedom, as evidenced by the fact that it provided parties with the freedom to contract-a statutory right unencumbered by any limitations. See 15 Pa.C.S. § 8520(d) (repealed 2016).

         Because the majority discussed Delaware law extensively, the dissent made it a point to discuss why the majority's reliance upon Delaware law contained major flaws. The dissent observed that Delaware adopted its own version of the Revised Uniform Limited Partnership Act of 1976 ("Model Act") in 1982. Pennsylvania followed suit in 1988. Then-Judge Donohue observed that the Model Act initially lacked any reference to the implied covenant of good faith and fair dealing. Similarly, at their inception, neither DRULPA nor PRULPA contained such a reference. In 2001, however, when a revised Model Act was published, it incorporated specific provisions indicating that parties to a limited partnership agreement owe one another the implied duty of good faith and fair dealing. In 2004, Delaware amended its act to add similar, but not verbatim, language. Then-Judge Donohue highlighted the fact that Pennsylvania never updated PRULPA to conform to the Model Act. Instead, the General Assembly incorporated Section 8520(d) into PRULPA, suggesting a departure from the Model Act. Finally, then-Judge Donohue observed that the Hanaways had available tort remedies through which they could have obtained relief, and she criticized them for failing to timely pursue these viable remedies.

         T.R. White sought discretionary review in this Court. We granted allocatur to consider whether the implied covenant of good faith and fair dealing applies to all limited partnership agreements formed in Pennsylvania, and, if so, whether the implied duty of good faith and fair dealing can override the express terms of a limited partnership agreement.

         T.R. White observes that neither this Court, nor any Pennsylvania statutory provision in effect at the time that the parties formed Parkesburg, directed that the implied covenant of good faith and fair dealing applied to limited partnership agreements. T.R. White espouses then-Judge Donohue's dissenting position, emphasizing that limited partnership agreements are unique and ill-suited for application of the implied covenant of good faith and fair dealing because they are governed by statute. Accordingly, T.R. White contends that limited partnership agreements should not be treated like other types of contracts. T.R. White argues that the Superior Court majority's reasoning is flawed because the court ignored the crucial differences between Pennsylvania law and Delaware law. To that end, T.R. White agrees with then-Judge Donohue's observations that DRULPA, unlike PRULPA, expressly mentions the implied covenant of good faith and fair dealing. T.R. White stresses the fact that DRULPA was amended in 2004 to align with the Model Act, whereas PRULPA evinced unfettered freedom to contract through Section 8520(d). Additionally, T.R. White argues that Delaware law simply cannot serve as a model for Pennsylvania limited partnerships on this issue, because the two states contain different statutes of limitations periods. Specifically, contract claims in Pennsylvania enjoy a longer statute of limitations.

         T.R. White directs our attention to House Bill 1398, which Governor Wolf signed into law on November 21, 2016, as Act 170. This new legislation, in relevant part, amends PRULPA to require that partners discharge their duties consistent with the contractual obligation of good faith and fair dealing.[10] According to T.R. White, this drastic change is evidence that the Superior Court has exceeded its authority in the instant case by taking it upon itself to rewrite the law. While T.R. White concedes that the implied covenant of good faith and fair dealing exists going forward, T.R. White asserts that it did not exist at the time that the parties formed Parkesburg and entered into a limited partnership agreement.

         T.R. White stresses that the terms of Parkesburg's limited partnership agreement clearly provided T.R. White with exclusive managerial authority. Permitting the Hanaways to invoke the implied covenant of good faith and fair dealing contradicts the intent of the parties and the unambiguous language of their agreement. T.R. White maintains that the Hanaways take issue merely with the unfettered discretionary power that they voluntarily entrusted to the general partner.[11] Finally, T.R. White asserts that the Hanaways are only now advancing a breach of contract claim, rooted in the implied duty of good faith and fair dealing, because they did not file their tort claims within the two-year statute of limitations, and because they failed to identify a specific term of the Parkesburg limited partnership agreement that T.R. White had breached. Because they sat on their rights, the Hanaways crafted an argument based upon the implied duty of good faith and fair dealing in order to avoid the statute of limitations governing tort claims.

         The Hanaways urge this Court to adopt the Superior Court's reasoning. They argue that the implied covenant of good faith applies to all contracts formed in Pennsylvania, including the 2005 Parkesburg limited partnership agreement. They claim that, because Delaware law and Gerber are comparable, the same principles should be applied to the facts of the instant case.

         Contrary to T.R. White's argument, the Hanaways emphasize that DRULPA does not expressly create an implied covenant of good faith and fair dealing. Rather, DRULPA "merely prevents the partners from abrogating the duty[, ] which attaches generally under Delaware common law." Appellees' Brief at 17. Accordingly, the Hanaways suggest that PRULPA and DRULPA are not entirely distinct.[12] They contend that limited partnership agreements should be treated like any other type of contract, and they urge this Court to hold that the General Assembly intended to import Section 205 of the Restatement of Contracts into Pennsylvania's Limited Partnership Act.

         According to the Hanaways, the fact that they did not pursue available tort remedies is irrelevant, because an action premised upon the implied covenant of good faith and fair dealing is a breach of contract claim, not an independent cause of action or a tort claim. They contend that the implied covenant of good faith and fair dealing never overrides express contract language. Instead, it merely infuses the performance of duties pursuant to an agreement and attaches to existing contract obligations.

         We review a trial court's order granting summary judgment for an error of law or an abuse of discretion. Gilbert v. Synagro Cent., LLC, 131 A.3d 1, 10 (Pa. 2015). A party is entitled to summary judgment if the record clearly demonstrates that there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Id. Any doubts as to the existence of a genuine issue of material fact must be resolved in favor of the non-moving party. Id. Whether the implied covenant of good faith and fair dealing may be implicated in all limited partnership agreements formed pursuant to Pennsylvania law is a question of law as to which we apply a de novo standard of review. We note that, "when interpreting a statute we must listen attentively to what the statute says, but also to what it does not say." Johnson v. Lansdale Borough, 146 A.3d 696, 711 (Pa. 2016). In other words, "it is not for the courts to add, by interpretation, to a statute, a requirement which the legislature did not see fit to include." Commonwealth v. Johnson, 26 A.3d 1078, 1090 (Pa. 2011).

         Preliminary, we note that, after the Superior Court issued its decision in the underlying case and just prior to oral argument before this Court, the General Assembly enacted Act 170. The new legislation amended PRULPA to expressly state, inter alia, that limited and general partners must discharge their duties consistent with the contractual obligation of good faith and fair dealing. Because this case precedes Act 170, we must consider whether the duty of good faith and fair dealing applied at the time that the parties formed Parkesburg in 2005 or at the time that an alleged breach arose in 2008. For the reasons that follow, we hold that it did not apply at either juncture.

         PRULPA governs all limited partnerships formed in Pennsylvania. 15 Pa.C.S §§ 8501, et seq. (repealed by Act of Nov. 21, 2016, P.L. 1328, No. 170). To form a Pennsylvania limited partnership, parties must comply with PRULPA's statutory directives. PRULPA defined a limited partnership as "[a] partnership formed by two or more persons under the laws of this Commonwealth and having one or more general partners and one or more limited partners." 15 Pa.C.S. § 8503 (repealed 2016). PRULPA also defined a partnership agreement as "[a]ny agreement, written or oral, of the partners as to the affairs of a limited partnership and the conduct of its business." Id. In order to form a limited partnership, PRULPA requires execution and filing of a certificate of limited partnership in the Department of State. 15 Pa.C.S. § 8511 (repealed 2016). The certificate must set forth certain information delineated in Subsection 8511(a). Because the existence of a limited partnership is dependent upon compliance with PRULPA, failure to conform to its various statutory provisions could lead to exposure to unwanted liabilities.

         At the time the parties formed Parkesburg, Section 8520 of PRULPA governed limited partnership formation and partnership agreements. It contemplated broad freedom of contract:

(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, except where this chapter:

(1) refers only to a rule as set forth in the certificate of limited partnership; or
(2) expressly provides that the partnership agreement shall not relax or contravene any provision ...

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