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").
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
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.
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
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.
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
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.
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
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 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.
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.
According to the Hanaways, the fact that they did not pursue available tort
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, 634 Pa. 651, 131 A.3d 1, 10 (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, 611 Pa. 381, 26 A.3d 1078, 1090 (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:
15 Pa.C.S. § 8520(d) (repealed 2016).
The Parkesburg limited partnership agreement conferred absolute discretionary authority upon T.R. White, as follows:
Parkesburg LPA ¶¶ 6.1-6.2 (emphasis added).
According to the agreement, the purpose of the partnership was to pursue "[r]eal [e]state investment and development." Id. at ¶ 2.1.1. The agreement provided that "the General Partner shall have the right, upon such terms and conditions as it, in its sole and absolute discretion, may deem advisable ... to cause the Partnership... to execute and deliver any contract, amendment, supplement or other document relating to the Business[.]" Id. at ¶¶ 6.5, 6.5.1. The Parkesburg agreement stated that "[t]he Limited Partners shall take no part in the management, shall not contribute any services to the Partnership and shall have no authority to act on behalf of, or to bind, the Partnership." Id. at ¶ 6.6.
This Court has never addressed the applicability of the implied covenant of good faith and fair dealing in the context of limited partnership agreements. Like then-Judge Donohue, we find it helpful to consider the evolution of PRULPA. The Model Act, which has served as a paradigm for most states drafting their own versions of the limited partnership act, initially did not reference the implied covenant of good faith and fair dealing. It was not until 2001 that a new, revised Model Act incorporated the contractual obligation of good faith and fair dealing. Specifically, Sections 110, 305, and 408 were updated to prevent parties from eliminating the obligation and to require parties to discharge duties in good faith. See Limited Duties of Limited Partners., Unif. Ltd. Part. Act 2001 §§ 110(b)(7), 305(b), and 408(d).
PRULPA's silence with respect to the duty of good faith and fair dealing, the fact that PRULPA expressly provided parties with contractual freedom, and the clear terms of the Parkesburg limited partnership agreement reveal to us that the implied covenant of good faith and fair dealing did not apply as a matter of law. This is a case in which a party failed to secure desirable contractual protections during negotiation of a limited partnership agreement.
In support of its holding, the Superior Court majority examined several decisions from this Court and from Pennsylvania's intermediate appellate courts that have applied the implied covenant of good faith and fair dealing in certain circumstances. For instance, in Murphy v. Duquesne Univ. of the Holy Ghost, 565 Pa. 571, 777 A.2d 418 (2001), this Court considered an employment contract, which provided an internal, judicial-like review process prior to a professor's forfeiture of tenure. This Court determined that such an internal review process accorded due process so long as the University performed its duties under the contract in good faith. In addition to Murphy, the Superior Court in this case found several intermediate appellate court cases to be instructive. See Somers, 418 Pa.Super. 131, 613 A.2d 1211; Baker, 350 Pa.Super. 68, 504 A.2d 247; Conomos, Inc., 831 A.2d 696; Herzog, 887 A.2d 313, supra.
This Court in Murphy, as well as the intermediate appellate courts in the foregoing cases, analyzed various contracts through a good faith lens. Some of the
Consistent with then-Judge Donohue's astute observations, we note that PRULPA governs limited partnership agreements, whereas the Uniform Commercial Code ("UCC") governs commercial contracts. Commercial contracts formed under the UCC must conform to its statutory provisions. Significantly, unlike the version of PRULPA that was in effect during the relevant time period, the UCC explicitly references the duty of good faith. It defines "good faith"
13 Pa.C.S. § 1304 (cmt 1).
The General Assembly intentionally imposed an affirmative good faith requirement upon parties to commercial contracts. Although it could have similarly referenced the duty of good faith in PRULPA, it chose not to do so. See City of Phila. v. Int'l. Ass'n of Firefighters, Loc. 22, 606 Pa. 447, 999 A.2d 555, 566 (2010) (explaining that "we ... presume that when enacting legislation, the General Assembly is familiar with extant law). Until Act 170, "the legislature did not see fit to include" such a provision, and "it is not for the courts to add, by interpretation, to a statute, a requirement which the legislature did not see fit to include." Johnson, 26 A.3d at 1090.
At oral argument, the Hanaways asserted that Act 170 serves only to confirm the existence of the duty of good faith and fair dealing in the context of limited partnership agreements. They claim that, through the amendments, the General Assembly has merely codified an obligation that existed all along. We disagree.
Prior to Act 170, there was no duty of good faith applicable to limited partnership agreements formed pursuant to PRULPA. Because the duty of good faith and fair dealing did not exist at the time that the parties entered into the Parkesburg limited partnership agreement, and because it did not exist at the time that an alleged breach occurred, it is unnecessary to address T.R. White's second inquiry — whether the implied duty of good faith and fair dealing can override the parties' express contract terms.
Chief Justice Saylor and Justices Todd and Dougherty join the opinion.
Justice Mundy files a dissenting opinion in which Justice Baer joins.
Justice Donohue did not participate in the consideration or decision of this case.
I dissent as I would conclude that the implied covenant of good faith and fair dealing applies to limited partnerships formed pursuant to Pennsylvania's Revised Uniform Limited Partnership Act (PRULPA), 15 Pa.C.S. §§ 8501-8594 (repealed 2016).
"Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement." RESTATEMENT (SECOND) OF CONTRACTS § 205.
I do not agree with the Majority's conclusion the general partner in a limited partnership agreement formed under the previous version of PRULPA was permitted to exercise its contractually-based discretion in bad faith, and the Hanaways had no recourse in a breach of contract claim. See Majority Op. at 156 ("Neither PRULPA nor the Parkesburg limited partnership agreement contained any restrictions on the ability of the general partner to carry out its obligations"). The Majority provides three reasons for its conclusion that the implied covenant of good faith and fair dealing did not apply to the Parkesburg limited partnership agreement: "PRULPA's silence with respect to the duty of good faith and fair dealing, the fact that PRULPA expressly provided parties with contractual freedom, and the clear terms of the Parkesburg limited partnership agreement[.]" Id. Essentially, the Majority's view is that unless PRULPA or the Parkesburg limited partnership agreement specifically incorporated the covenant of good faith and fair dealing, it did not exist as a matter of law.
I would conclude that the duty of good faith and fair dealing in performance and enforcement is implied in every contract by common law, unless a statute or the parties' agreement specifically abridges it. In my view, PRULPA's silence as to the duty of good faith and fair dealing was not sufficient to eliminate it. As stated in Section 205 of the Restatement (Second) of Contracts, the duty is imposed on every contract. PRULPA's silence did not alter this obligation. Accordingly, I would read the "freedom of contract" provision previously contained in 15 Pa.C.S. § 8520 (repealed in 2016), as permitting the parties to eliminate the obligation of good faith and fair dealing in whole or in part through specific language in their partnership agreement. This interpretation is supported by the General Assembly's amendment of PRULPA through the enactment of Section 8615 and the repeal of Section 8520. Specifically, Section 8615(c)(11) states that a partnership agreement cannot alter the contractual obligation of good faith and fair dealing, and the comment to Section 8615(c)(11) provides that it "refer[s] to the `contractual obligation of good faith and fair dealing,' which contract law implies in every contract." 15 Pa.C.S. § 8615 cmt. The General Assembly did not state that it was creating or imposing a new obligation of good faith and fair dealing that did not previously exist in limited partnership agreements. Id. Instead, Section 8615(c)(11) precludes the parties from eliminating the obligation of good faith and fair dealing that contract law implies in every contract, either in whole or in part, which Section 8520 had previously permitted.
The contractual obligation of good faith is defined by the Restatement (Second) of Contracts: "Good faith performance or enforcement of a contract emphasizes 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) CONTRACTS § 205 cmt. a. Further, "[w]hen exercising a discretionary right, a party to the contract must exercise its discretion reasonably." Gerber v. Enter. Prods. Holdings, LLC, 67 A.3d 400, 419 (Del. 2013) (emphasis omitted) (quoting ASB Allegiance Real Estate Fund v. Scion Breckenridge Managing Member, LLC, 50 A.3d 434, 441 (Del. Ch. 2012), rev'd in part on other grounds, 68 A.3d 665, (Del. 2013)), overruled on other grounds, Winshall v. Viacom Int'l, Inc., 76 A.3d 808 (Del. 2013); accord UNIF. LTD. P'SHIPS ACT § 409 cmt. Subsection (d) (2001). "An implied covenant claim ... [asks] what the parties would have agreed to themselves had they considered the issue in their original bargaining positions at the time of contracting." Gerber, 67 A.3d at 418 (quoting ASB Alliance, 50 A.3d at 440). "In sum, the purpose of the contractual obligation of good faith and fair dealing is to protect the arrangement the partners have chosen for themselves, not to restructure that arrangement under the guise of safeguarding it." UNIF. LTD. P'SHIPS ACT § 409 cmt. Subsection (d) (2001).
In this case, the implied obligation of good faith and fair dealing does not add
Accordingly, I would affirm the order of the Superior Court.
Justice Baer joins this dissenting opinion.
15 Pa.C.S. § 8611.
This opinion interprets the law in effect at the time the parties entered into their agreement and at the time of the alleged breach. The parties agree that the amendments do not apply to this dispute. The impact and interpretation of the new law (Section 8611) is not encompassed within our allocatur grant, and, therefore, is not part of this case.
15 Pa.C.S. § 8615. Subsection 8635(a), relating to limited duties of limited partners, provides as follows:
15 Pa.C.S. § 8635(a). Subsection 8649(d), relating to standards of conduct for general partners, provides as follows:
15 Pa.C.S. § 8649(d).
The trial court subsequently presided over a four-day bench trial to address the Hanaways' three remaining claims. The trial court ruled in favor of T.R. White as to all claims. The Hanaways appealed to the Superior Court, challenging the trial court's decision as to all six counts. The Superior Court reversed the trial court's order granting summary judgment as to the breach of contract claim, but affirmed the trial court as to all other issues. The scope of our allocatur grant pertains only to the trial court's and Superior Court's treatment of the breach of contract claim.
DEL. CODE. title 6, 17-1101.
15 Pa.C.S. § 8649(d) (effective Feb. 21, 2017). Through Act 170, the General Assembly also deleted Subsection 8520(d) relating to freedom to contract.