Hanaway, L. v. The Parkesburg Group

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

In the Court of Common Pleas of Chester County

Civil Division at No(s): 2011-01522

BEFORE: BOWES, DONOHUE, AND STABILE, JJ.

OPINION BY BOWES, J.: FILED DECEMBER 15, 2015

Lynn J. Hanaway and Connie Hanaway appeal from the judgment

entered August 14, 2014, in favor of Appellees and dismissing their equity

claims following a non-jury trial. They also challenge the January 23, 2014

grant of summary judgment on their contract and tort claims. After careful

consideration, we affirm in part, reverse in part, and remand for further

proceedings consistent herewith.

In May 1998, the Hanaways, together with general partner T.R. White,

Inc. (“T.R. White”) and several individuals and entities who are not parties

herein, formed Sadsbury Associates, L.P. (“Sadsbury”), a limited

partnership, for purposes of developing and selling real estate. The

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Hanaways were among several limited partners. In October 2005, Lynn

Hanaway approached general partner T.R. White with a potential

development project, which the parties refer to as “the Subdivision.” T.R.

White, the Hanaways, and the other limited partners of Sadsbury Associates,

L.P., formed The Parkesburg Group, L.P. (“TPG”), to pursue the project. The

Hanaways owned 32.4% of TPG.

The Subdivision was originally intended to consist of three separate

properties: 1) the Davis Tract, a 43-acre parcel of unimproved land; 2) the

Loue Tract, a 17-acre parcel of unimproved land; and 3) the Quarry, an

11.6-acre parcel, which was owned by the Hanaways and which TPG had an

option to purchase for $180,000. TPG had options to purchase the Davis

and Loue Tracts for no less than $850,000 and $800,000, respectively.

TPG acquired the Davis Tract on July 11, 2006, and obtained

preliminary approvals for a townhome subdivision on that property.

Thereafter, TPG received several written offers from various real estate

developers for the 343 lots comprising the Davis Tract, as well as some

offers that included the Loue parcel. TPG did not pursue the offers. In

February 2007, the Hanaways, through their counsel, notified T.R. White

that the option on the Quarry had expired and that they would no longer

include that property as part of the Subdivision for development. T.R. White

then called for capital to exercise the option to purchase the Loue parcel in

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order to continue the project, but the Hanaways and the other limited

partners refused to contribute.1

Lacking funds to continue with the project, T.R. White, who had “full,

exclusive and complete discretion in the management and control of” TPG,

advised the Hanaways by correspondence dated September 25, 2007, that it

intended to get an independent appraisal and sell the Davis Tract and the

option for the Loue parcel together. See LPA at ¶6.2. On November 29,

2007, TPG sold the Davis property and the Loue option to Parke Mansion

Partners, LP (“PMP”) for $1.9 million. PMP was a limited partnership created

by T.R. White and all of the limited partners of TPG with the exception of the

Hanaways. PMP exercised the option to purchase the Loue Tract for

$800,000 the following day. The Hanaways pled that the agreement to

transfer the properties to PMP was made without their knowledge or consent

and that Appellees intentionally concealed this transfer from them.

Complaint, ¶ 43.

On February 11, 2011, two and one-half years after the transfer of the

Davis Tract and Loue option to PMP, the Hanaways filed a complaint against

TPG, PMP, Sadsbury, and T.R. White, Appellees herein. They alleged breach

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1

The limited partnership agreement provided that the limited partners had

no obligation to contribute money to the limited partnership beyond their

initial capital contribution. Limited Partnership Agreement, ¶5.3.

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of contract, conversion, and breach of fiduciary duty, and sought an

accounting, appointment of a receiver, and alternative equitable relief. The

Hanaways had originally invested $316,216.22 in TPG, but upon its

liquidation only received $196,083.20. They sought to recover the $120,000

deficit in the value of their investment in the real estate development

project, which they contended was sold significantly below market value by

T.R. White on behalf of TPG in order to eliminate the Hanaways’ ownership

interest in the real estate. Partial summary judgment was granted in favor

of all Appellees on the conversion and breach of fiduciary duty counts based

on the expiration of the two-year statute of limitations for tort claims and on

the contract count for failure to state a claim.

A bench trial commenced on July 7, 2014, on the remaining claims for

equitable relief. On August 14, 2014, the court found in favor of Appellees,

concluding, inter alia, that the doctrine of laches barred the Hanaways’

equity claims. No post-trial motions were filed. The Hanaways appealed to

this Court on September 3, 2014, and complied with the trial court’s order to

file a Pa.R.A.P. 1925(b) concise statement of errors complained of on

appeal. The Hanaways present five issues for our review:

I. Where a partnership agreement contained a requirement

that all notices to parties be made by personal delivery or sent

by registered mail and the general partner sent only a vague

notice of a sale of real estate by regular mail, did the lower

Court commit an error of law by ruling that the Plaintiffs received

proper notice of the sale based upon constructive or actual

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knowledge so as to commence the running of the statutory

period of limitations?

II. Where a deed conveys real estate from one partnership

where the Plaintiffs were partners to another partnership

(surreptitiously established by all the partners of the conveying

partnership except the Plaintiffs) and the deed conveying the real

estate sets forth only the names of the grantor LP and the

grantee LP, not the underlying owners of each entity, did the

Court commit an error of law by finding that the deeds provided

constructive notice of the transfer to the Plaintiffs sufficient to

commence the running of the statutory period of limitations?

III. Where the Defendants concealed material facts and

information concerning the transfer of the real estate, failed to

comply with the notice requirements of the partnership

agreement for the transfer of the real estate, withheld

information regarding ownership of the transferee entity,

extensively misrepresented financial ownership regarding the

distribution of the proceeds from the sale of the real estate and

continued to improperly withhold information and documents

after the Complaint was filed, did the Court abuse its discretion

in determining that the discovery rule or the concealment

doctrine did not preclude the running of the statutory period of

limitations?

IV. If the trial judge improperly ruled as a matter of law that

the lapse of the statute of limitations precluded the assertion of

Plaintiffs’ tort claims, did the Court also commit an error of law

by dismissing Plaintiffs’ claims in equity based upon the theory of

laches solely in reliance upon the expiration of the statute of

limitations for Plaintiffs’ tort claims?

V. Where the partnership agreement guaranteed that

Plaintiffs would receive 32.4% of the partnership profits and the

Defendants sold real estate of the partnership in a bad faith

transaction to another partnership (consisting of the same

partners who owned the grantor except for Plaintiffs) at a price

nearly six million dollars below fair market value, did the trial

judge commit an error of law by ruling that the Defendants did

not breach the duty of good faith in every contract?

Appellants’ brief at 3-4.

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The Hanaways’ first three issues challenge the propriety of the trial

court’s dismissal of their conversion and breach of fiduciary duty claims as

time-barred by the two-year tort statute of limitations. “Summary judgment

is appropriate only in those cases where the record clearly demonstrates

that there is no genuine issue of material fact and that the moving party is

entitled to judgment as a matter of law.” Atcovitz v. Gulph Mills Tennis

Club, Inc., 812 A.2d 1218, 1221 (Pa. 2002); Pa.R.C.P. 1035.2(1). In ruling

on a motion for summary judgment, “the trial court must resolve all doubts

as to the existence of a genuine issue of material fact against the moving

party,” and grant summary judgment only “where the right to such

judgment is clear and free from all doubt.” Id.

On appeal,

we may reverse a grant of summary judgment if there has been

an error of law or an abuse of discretion. But the issue as to

whether there are no genuine issues as to any material fact

presents a question of law, and therefore, on that question our

standard of review is de novo. This means we need not defer to

the determinations made by the lower tribunals. Weaver v.

Lancaster Newspapers, Inc., 592 Pa. 458, 926 A.2d 899,

902-03 (Pa. 2007) (internal citations omitted). To the extent

that this Court must resolve a question of law, we shall review

the grant of summary judgment in the context of the entire

record. Id. at 903.

Summers v. Certainteed Corp., 997 A.2d 1152, 1159 (Pa. 2010).

The Hanaways mount a multi-pronged attack on the trial court’s ruling

that their tort claims were time barred. Initially, they contend that since

TPG’s notice of the transfer of the Davis Tract and Loue option by first class

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mail did not comply with the express written notice requirements of the

Limited Partnership Agreement (“LPA”), the statute of limitations did not

commence to run and summary judgment was improper on that basis.

Appellees counter that whether notice was sent by registered or certified

mail is irrelevant to a determination of when the statute of limitations began

to run since the limitations period commences when one knows or

reasonably should know that a cause of action has accrued. They contend

that the Hanaways cannot avail themselves of the tolling provisions of the

discovery rule because they had actual knowledge as well as constructive

notice of the transfers by 2008. Appellees rely upon Dalrymple v. Brown,

701 A.2d 164, 167 (Pa. 1997), in support of their position that the discovery

rule only comes into play where the existence of the injury is unknown and

cannot be ascertained within the applicable statute of limitations with the

exercise of reasonable diligence.

Alternatively, the Hanaways argue that the trial court erred in relying

upon Weik v. Estate of Brown, 794 A.2d 907 (Pa.Super. 2002), for the

proposition that the recording of the deeds provided constructive notice to

them of possible tort claims and started the running of the statute of

limitations on those claims. In Weik, the recording of deeds was held to be

constructive notice to plaintiff of the property transfer and breach of his

option agreement for purposes of the statute of limitations. The Hanaways

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argue that Weik is distinguishable because there was no contract requiring

all notices to be sent by certified mail in that case.

Lastly, the Hanaways argue that the statute of limitations was tolled

because T.R. White and TPG concealed and withheld information that would

have enabled them to discover that the transaction was intended to

eliminate their ownership. They point to evidence that they were denied

access to records and that T.R. White intentionally misrepresented financial

information to conceal its intentions. Appellees respond that the Hanaways

had both actual knowledge and constructive notice of the facts underlying

their claims. They point to the Hanaways’ knowledge in 2008 that TPG sold

the property to PMP for a price that the Hanaways believed was too low, and

that the impetus for the sale was the Hanaways’ refusal to contribute further

funds for the development of the property.

The trial court concluded that the tort actions were time-barred

because the Hanaways had actual knowledge of the transfer of the Davis

tract and Loue option due to the receipt of correspondence notifying them of

the sale. The court rejected the Hanaways’ contention that the notice

requirements in the limited partnership agreement distinguished Weik,

finding them “irrelevant to the standard for assessing the start date for the

running of the statute of limitations.” Trial Court Opinion, 8/14/14, at 4.

The basic legal principles applicable to the statute of limitations are set

forth in Fine v. Checcio, 870 A.2d 850 (Pa. 2005), wherein the Supreme

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Court examined the application of both the discovery rule and the doctrine of

equitable tolling due to fraudulent concealment. Wilson v. El-Daief, 964

A.2d 354 (Pa. 2009).

Fine reflects the general rule that a cause of action accrues,

and thus the applicable limitations period begins to run, when an

injury is inflicted. In certain cases involving latent injury, and/or

instances in which the causal connection between an injury and

another's conduct is not apparent, the discovery rule may

operate to toll the statute of limitations until the plaintiff

discovers, or reasonably should discover, that she has been

injured and that her injury has been caused by another party's

conduct. Fine also reflects that the determination concerning

the plaintiff's awareness of the injury and its cause is fact

intensive, and therefore, ordinarily is a question for a jury to

decide. However, courts may resolve the matter at the summary

judgment stage where reasonable minds could not differ on the

subject.

Id. at 361-62 (citations and footnote omitted). As this Court noted in

Coleman v. Wyeth Pharmaceuticals, Inc., 6 A.3d 502, 511 (Pa.Super.

2010) (quoting in part Pocono International Raceway, Inc. v. Pocono

Produce, Inc., 468 A.2d 468, 471 (Pa. 1983)), “[i]f the injured party could

not ascertain when he was injured and by what cause within the limitations

period, ‘despite the exercise of reasonable diligence,’ then the discovery rule

is appropriate.”

Due diligence is ascertained by an objective standard, Coleman,

supra, and to “demonstrate reasonable diligence, a plaintiff is required to

establish that he exhibited ‘those qualities of attention, knowledge,

intelligence and judgment which society requires of its members for the

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protection of their own interests and the interests of others.’” Wilson,

supra at 363 n.6 (quoting in part Cochran v. GAF Corp., 666 A.2d 245,

249 (Pa. 1995)). The party seeking application of the discovery doctrine

bears the burden of proof. Wilson, supra; Coleman, supra.

We agree with the trial court that the technical deficiency in the notice

is of no consequence in our statute of limitations analysis. In determining

whether the discovery rule operated to toll the running of the statute of

limitations on tort claims, breach of a contractual notice provision is only

relevant to the extent that it demonstrates actual lack of notice or

knowledge. The discovery rule only will operate to toll the running of the

statute of limitations where, despite due diligence, one is unaware that he

has been injured and has a cause of action.

Although the Hanaways did not receive notice of the sale by registered

or certified mail return receipt requested, it is undisputed that they received

notice by first class mail and had actual knowledge of the transfer. The

Hanaways admitted that they learned by May 2008 that TPG transferred to

PMP the Loue option, and by December 2008, the Davis tract. Answers to

Interrogatories, Exhibit 9 at No. 7. The Hanaways’ daughter conducted an

online deed search in 2008 that revealed PMP’s purchase of both properties

and she admitted that she showed the information to Mr. Hanaway. Id.,

Exhibit 10, at 110-11. In addition, counsel for the Hanaways received an

appraiser’s report on February 15, 2008, concluding that the sale of the

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Davis tract to PMP for $1.9 million was far below that property’s fair market

value.2 Moreover, as early as May 8, 2008, Mr. Hanaway referenced the

transfer in a memorandum to counsel and complained that he received no

notice, was not included in the transaction, and questioned the legality of

the sale. Thus, there is no genuine issue of fact regarding the Hanaways’

notice or knowledge of the sale of the Davis tract and Loue option to PMP

more than two years prior to the filing of the instant lawsuit.

The Hanaways argue, however, that knowledge or notice of the sales

was not sufficient to apprise them of possible claims. They maintain that the

recorded deeds merely listed the buyer as PMP and did not list the owners of

PMP. They contend that they could not institute suit earlier because they did

not know whether they were partners in PMP. The trial court found,

however, that the Hanaways failed to identify a single fact that would

reasonably suggest that they were partners in PMP. They admittedly had

not signed a partnership agreement for PMP, contributed to that partnership,

or received a tax return from that entity. Deposition of Lynn Hanaway,

4/4/13, at 163-66. Furthermore, the court noted that they actually filed suit

prior to the date they claimed to have learned who owned PMP, which the

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2

The Hanaways’ appraiser assigned a market value of $8.5 million to the

unimproved Davis and Loue properties, which had been approved for the

construction of 323 townhouses.

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court viewed as proof that ignorance of PMP’s owners was no impediment to

bringing the action. Order, 1/23/14, at n.1.

Where, as here, the Hanaways had both constructive notice and actual

knowledge of the transfers, we agree that they were in possession of

sufficient facts to prompt inquiry into the effect of the transfer on their own

interests. Once the Hanaways knew that TPG sold the Davis tract and Loue

option to PMP for what they believed to be less than market value, the

limitations period commenced to run. We find no merit in the Hanaways’

arguments that the discovery rule operated to toll the statute of limitations.

Nor did the Hanaways identify any misrepresentation on the part of

Appellees tantamount to fraudulent concealment that purportedly caused

them to limit their inquiry or relax their vigilance and toll the statute of

limitations. The record substantiates that the Hanaways were aware that,

due to a lack of working capital, T.R. White intended to sell the property.

Correspondence between the Hanaways and T.R. White suggests that they

were at odds over the use of the property. The record reveals that the

Hanaways sought legal advice early on, hired an appraiser, and checked the

property transfers. This conduct is inconsistent with that of parties

complacent in the belief that their partners were acting in their best interest.

Thus, the Hanaways have not offered facts that would operate to toll the tort

statute of limitations based on fraudulent concealment. The tort claims were

asserted after the expiration of the two-year statute of limitations, and we

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find no error in the trial court’s grant of summary judgment in favor of

Appellees on that basis.

Next, the Hanaways allege that the trial court erred in dismissing their

equity claims based upon the doctrine of laches. The mere passage of time

is not enough, according to the Hanaways, for the defense to apply. The

Hanaways argue that Appellees had the burden of showing prejudice due to

the five-month delay, which they failed to do. See Young v. Hall and

Behrand, 218 A.2d 781 (Pa. 1966). Furthermore, the Hanaways

maintained they were entitled to trust their partners and relax their vigilance

due to the existence of a fiduciary relationship between them. The

Hanaways contend that they were not required to strictly comply with

statutes of limitation in light of the special relationship that lulled them into

believing that their partners’ actions were proper.

Appellees counter that the Hanaways waived any objection to the trial

court’s finding of laches by failing to file a post-trial motion within ten days

after the court’s decision in the non-jury trial. See Pa.R.C.P. 227.1(c).

Such a motion is required in an equity proceeding. See Chalkey v. Roush,

805 A.2d 491, 494 (Pa. 2002). Furthermore, the Hanaways compounded

that waiver by failing to identify this as error in their Pa.R.A.P. 1925(b)

concise statement of errors complained of on appeal. Consequently, the trial

court did not address this issue in its Rule 1925(a) opinion.

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Additionally, Appellees point out that the Hanaways’ equity claims for

appointment of a receiver and equitable accounting were denied on

additional bases, which they have not challenged on appeal. Thus, Appellees

contend, even if there was merit in the Hanaways’ laches argument, it would

not constitute reversible error. Finally, Appellees submit that the argument

fails on the merits. They offer authority to the effect that laches typically

follows the statute of limitations. See Ebbert v. Plymouth Oil Co., 34

A.2d 493, 495 (Pa. 1943); Ritter v. Theodore Pendergrass Teddy Bear

Prods., Inc., 514 A.2d 930, 934 (Pa.Super. 1986).

Although we find merit in the Hanaways’ position that a laches defense

involves a showing of prejudice, and that arguably no showing was made

herein, the Hanaways’ failure to file a motion for post-trial relief challenging

the court’s finding in this regard is fatal. Post-trial motions must be filed

within ten days after the filing of a decision in the case of a trial without a

jury. Pa.R.C.P. 227.1(c)(2). The failure to raise an issue in a post-trial

motion results in waiver of the issue on appeal. Bensinger v. Univ. of

Pittsburgh Med. Ctr., 98 A.3d 672 (Pa.Super. 2014). We agree with the

trial court that the Hanaways failed to preserve this claim.

We turn now to the Hanaways’ final claim that the trial court erred in

granting summary judgment and dismissing their breach of contract claim.

The breach of contract claim was originally asserted against TPG, Sadsbury,

and their general partner, T.R. White, but subsequently focused on T.R.

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White and its improper use of a capital call directed to the Hanaways,

inadequate notice of sale of the property, and sale of TPG property at a price

$6 million below market value. The Hanaways maintain that T.R. White

breached both the express terms of the limited partnership agreement and

its implied covenant of good faith and fair dealing, and that the trial court

erroneously determined, as a matter of law, that T.R. White’s exclusive right

to manage the business of TPG negated any duty of good faith implied in the

partnership agreement.3 The Hanaways assert that where an obligation

necessary to a party’s enjoyment of the benefits of the contract is not

specifically provided, it may be implied to prevent a bad faith breach. They

argue that T.R. White was obligated to exercise its management powers in

good faith and in a manner that would permit the Hanaways to enjoy the

profits due them. The sale of TPG property to PMP at a price well below

market value resulted in a substantial loss of their original investment and

eliminated any profit to them while benefitting T.R. White and the other

limited partners operating as PMP.

T.R. White counters that the trial court properly found that it had the

exclusive right and discretion to manage the partnerships, including the sale

of property, and that the Hanaways failed to identify any provision of the

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3

We read the Hanaways’ pleadings as alleging a breach of contract premised

on T.R. White’s bad faith sale of TPG property.

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LPA that was breached by selling the Davis tract and Loue option below

market value. Order, 1/23/14, at n.1. Specifically, the trial court found that

the Hanaways failed to plead that the capital call and lack of certified mail

notice of the sale of property constituted breaches of the partnership

agreement, and additionally found no merit in those claims. Trial Court

Opinion, 10/30/14, at 5-7. Finally, the trial court found that breach of the

implied covenant of good faith and fair dealing could not override the

express terms of the contract conferring unfettered discretion upon the

general partner to sell partnership property. Id. at 8. Since we conclude

that T.R. White was bound to act in good faith and deal fairly in the

performance of his duties under the LPA, including the exercise of its

discretion to sell the properties, we disagree with the trial court’s latter

conclusion.

The intermediate appellate courts of this Commonwealth have applied

the Restatement (Second) of Contracts § 205, which provides that, “Every

contract imposes on each party a duty of good faith and fair dealing in its

performance and its enforcement.” This Court invoked § 205 in Baker v.

Lafayette College, 504 A.2d 247 (Pa.Super. 1986), and held that where

the College expressly provided in an employment contract for a

comprehensive evaluation and review process, it had a limited duty to

conduct that evaluation in good faith. We noted that the College’s obligation

to act in good faith extended to the performance of the duties it assumed

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under the contract and found this consistent with the general duty of

contracting parties to perform their contractual obligations in good faith as

set forth in the Restatement (Second) of Contracts §205.4

In Somers v. Somers, 613 A.2d 1211 (Pa.Super. 1992), after noting

that the general duty of good faith and fair dealing of § 205 had been

adopted earlier in Baker, supra, and Creeger Brick & Building Supply

Inc. v. Mid-State Bank & Trust Co., 560 A.2d 151, 153 (Pa.Super. 1989),

this Court applied it to a consulting agreement. In that case, an uncle sold a

portion of his stock in his construction company to his nephew and

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4

In Ash v. Cont’l Ins. Co., 932 A.2d 877, 883 (Pa. 2007), our High Court

noted “considerable disagreement over the applicability of the implied duty

of good faith.” It observed that the Superior Court opined in Herzog v.

Herzog, 887 A.2d 313, 317 (Pa.Super. 2005) and John B. Conomos, Inc.

v. Sun Company, Inc., 831 A.2d 696, 705-06 (Pa.Super. 2003), that

Pennsylvania has adopted § 205 and applied it to every contract. The

Commonwealth Court also has recognized the § 205 implied covenant, but

limited its application. See Agrecycle, Inc. v. City of Pittsburgh, 783

A.2d 863 (Pa.Cmwlth. 2001) (a separate duty of good faith performance of

contracts “may not be implied where (1) a plaintiff has an independent

cause of action to vindicate the same rights with respect to which the

plaintiff invokes the duty of good faith; (2) such implied duty would result in

defeating a party's express contractual rights specifically covered in the

written contract by imposing obligations that the party contracted to avoid;

or (3) there is no confidential or fiduciary relationship between the

parties.”). Department of Transportation v. E-Z Parks, Inc., 620 A.2d

712 (Pa.Cmwlth. 1993). The Ash Court also pointed out that several

Justices have stated in non-precedential opinions that the § 205 duty is

implied in every contract. See Bethlehem Steel Corp. v. Litton

Industries, Inc., 488 A.2d 581, 600 (Pa. 1985) (Zappala, J., Opinion in

Support of Reversal); Frickert v. Deiter Bros. Fuel Co., 347 A.2d 701, 705

(Pa. 1975) (Pomeroy, J., concurring). However, the Ash Court declined to

discuss the issue, as it was not before the Court.

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surrendered his remaining shares for redemption, resulting in the nephew

becoming the sole shareholder and president of the corporation. At the

same time, uncle was hired as a consultant pursuant to an agreement that

gave him the authority to act with the nephew regarding a particular

construction project. In addition to monthly consulting fees, uncle was to

receive fifty percent of the net profits from that project. At the conclusion of

construction, there were outstanding claims among the corporation, the

Office of General Services, and various subcontractors. When uncle and

nephew disagreed over the handling of these claims, nephew terminated his

uncle’s employment. Uncle filed a suit alleging that his nephew showed a

lack of good faith and due diligence in the resolution of the dispute. He

claimed that nephew settled the corporation’s claim for significantly less than

was owed, thereby depriving uncle of approximately $3 million as his share

of the net profits. Although uncle did not assert a breach of a specific

contractual provision, this Court held that the uncle stated a claim for breach

of contract “based on the implied obligation to act in good faith and do

nothing to destroy the rights of the other party to receive the fruits of the

agreement[,]” id. at 1215, and reversed the grant of a demurrer.

Years later, in Murphy v. Duquesne Univ. of the Holy Ghost, 777

A.2d 418, 434 (Pa. 2001), our Supreme Court agreed with this Court’s

statement in Baker, supra, that “when an employer expressly provides in

an employment contract for a comprehensive evaluation and review process,

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a court may look to the employer's good faith to determine whether the

employer has in fact performed those contractual duties.” Id. at 255.

Without referencing § 205, our High Court pointed out that, “this obligation

of good faith is tied specifically to and is not separate from the duties a

contract imposes on the parties” and “is akin to the contract doctrine of

necessary implication.” Id. It described the doctrine:

In the absence of an express provision, the law will imply an

agreement by the parties to a contract to do and perform those

things that according to reason and justice they should do in

order to carry out the purpose for which the contract was made

and to refrain from doing anything that would destroy or injure

the other party's right to receive the fruits of the contract.

Murphy, supra at 434 n.11 (quoting Slater v. Pearle Vision Center, 546

A.2d 676, 679 (Pa.Super. 1988) (quoting Frickert v. Deiter Bros. Fuel Co.

Inc., 347 A.2d 701 (Pa. 1975) (Pomeroy, J., concurring))).

Just two years later, this Court decided John B. Conomos, Inc. v.

Sun Company, Inc., 831 A.2d 696 (Pa.Super. 2003). Sun contracted with

Conomos for industrial painting services at its refinery. Sun’s inspector

found the surface preparation of the pipe by Conomos to be unacceptable

and demanded preparation that Conomos believed exceeded the industry

standard and agreed upon scope of work. Conomos complied with the

additional requirements, but incurred added expense. When Conomos

sought additional compensation and Sun did not respond, Conomos left the

job and Sun cancelled the contract. Conomos sued for the balance due

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under the contract, the cost of the additional preparation required, and

asserted a claim under the Contractor and Subcontractor Payment Act.

At issue was whether Sun owed a duty of good faith to Conomos,

whether that duty was breached, and if so, what implications that breach

had on the limited damages clause in the contract. We found that there was

an implied duty of good faith in Sun’s contractual duty to inspect the surface

preparation performed by Conomos so as not to “defeat Conomos’s

reasonable expectation that work of sufficient quality will be compensated as

agreed.” Conomos, supra at 707. We explained that, “[b]oth the implied

covenant of good faith and the doctrine of necessary implication are

principles for courts to harmonize the reasonable expectations of the parties

with the intent of the contractors and the terms in their contract.” Id. The

doctrines “serve to imply terms that the parties would have spelled out had

they foreseen their need, a breach of such implied terms is equivalent to a

breach of any other provision in the contract.” Id. at 708. See also

Herzog v. Herzog, 887 A.2d 313 (Pa.Super. 2005) (characterizing the

implied term of fair dealing in § 205 as “the principle fundamental to

contract law” and finding such a duty in marital settlement agreement).

As these cases demonstrate, a breach of the covenant of good faith

and fair dealing is a breach of contract action, not an independent action for

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breach of a duty of good faith.5 LSI Title Agency, Inc. v. Evaluation

Servs., 951 A.2d 384, 391 (Pa.Super. 2008). The implied covenant of good

faith and fair dealing attaches to existing contractual obligations; it does not

add new contractual duties. In essence, the duty to act in good faith and

deal fairly infuses the parties’ performance of their express contractual

obligations. In determining whether there has been a breach of contract, we

evaluate the conduct of a party through the lens of good faith and fair

dealing.

With slight variances due to context, good faith is understood to mean

“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) of Contracts §205, Comment a. In Cable & Associates Ins.

Agency v. Commercial Nat’l Bank of Pennsylvania, 875 A.2d 361, 364

(Pa.Super. 2005) (quoting Gorski v. Smith, 812 A.2d 683, 710 (Pa.Super.

____________________________________________

5

The dissent’s contention that the Hanaways abandoned their claim that

T.R. White breached the express terms of the partnership agreement by

arguing breach of an implied duty of good faith and fair dealing is incorrect.

On the contrary, the Hanaways’ breach of contract claim is premised on T.R.

White’s bad faith performance of its contractual obligations. Nor are we

recognizing a new cause of action for breach of such an implied covenant.

When a party fails to perform its contractual obligations in good faith, an

action for breach of contract is the remedy.

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2003)), we defined the duty of good faith as “[h]onesty in fact in the

conduct or transaction concerned.”

The contract at issue herein is the LPA. It provides that “the business

and affairs of the Partnership shall be controlled by the General Partner.”

LPA, Art. VI, ¶6.1. In addition, “[t]he General Partner shall have full,

exclusive and complete discretion in the management and control of the

business of the Partnership, and shall have all such other powers of a

general partner in a partnership formed under Pennsylvania law without

limited partners, the exercise of which are consistent with the Business of

the Partnership.” LPA, Art. VI, ¶6.2; see also Clement v. Clement, 260

A.2d 728 (Pa. 1970); Jarl Invs., L.P. v. Fleck, 937 A.2d 1113 (Pa.Super.

2007).6

It is undisputed that T.R. White owed a fiduciary duty to TPG and its

limited partners. See 15 Pa.C.S. § 8334; see also eToll, Inc. v.

Elias/Savion Adver., 811 A.2d 10, 22 (Pa.Super. 2002) (A fiduciary duty

arises from a “special relationship” between the parties involving

“confidentiality, the repose of special trust, or fiduciary responsibilities.”).

However, any remedy for T.R. White’s alleged breach of fiduciary duty was

____________________________________________

6

Generally, unless otherwise provided in the limited partnership agreement,

a general partner of a limited partnership has the same rights, powers, and

restrictions as a partner in a partnership without limited partners. 15

Pa.C.S. § 8333.

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grounded in tort and was time-barred. The question before us is whether

Pennsylvania law imputes the same implied duty of good faith and fair

dealing in the performance of contractual duties in a limited partnership

agreement as in other contracts. In performing its management duties, did

T.R. White have a duty to act in good faith and consistently with the limited

partners’ expectations? For the reasons that follow, we answer that

question in the affirmative, finding no reason to treat a limited partnership

agreement differently than any other contract.7

The highest court in our neighboring state of Delaware explained the

difference between the covenant of good faith and fair dealing and a

fiduciary duty in the context of a limited partnership agreement in Gerber v.

Enterprise Products Holdings, LLC, 67 A.3d 400 (Del. 2013) (overruled

on other grounds by Winshall v. Viacom Intern., Inc., 76 A.3d 808 (Del.

2013)). The distinction is significant under Delaware law because parties to

limited partnership agreements are permitted to contractually “expand,

____________________________________________

7

The dissent maintains that limited partnership contracts are unique

because limited partnerships are statutory creations. It implies that absent

legislative recognition of an implied covenant in a limited partnership

agreement, none exists. The dissent does not cite any authority for that

proposition. In light of the fact that the legislature is presumed to know the

existing law when it passes a statute, we submit that the fact the legislature

did not specifically abrogate an implied covenant of good faith and fair

dealing in a limited partnership agreement suggests that it intended to

include the covenant in such contracts.

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restrict, or eliminate any fiduciary duties that a person may owe.” Delaware

Revised Uniform Limited Partnership Act, 6 Del. C. § 17-1101(d). That same

section also provides, however, that the parties cannot contract to eliminate

the implied contractual covenant of good faith and fair dealing. Id. Thus, 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.8

____________________________________________

8

The Gerber Court explained the difference between a fiduciary duty and

the implied covenant of good faith and fair dealing:

Under a fiduciary duty or tort analysis, a court examines the

parties as situated at the time of the wrong. The court

determines whether the defendant owed the plaintiff a duty,

considers the defendant's obligations (if any) in light of that

duty, and then evaluates whether the duty was breached.

Temporally, each inquiry turns on the parties' relationship as it

existed at the time of the wrong.

....

An implied covenant claim, by contrast, looks to the past. It is

not a free-floating duty unattached to the underlying legal

documents. It does not ask what duty the law should impose on

the parties given their relationship at the time of the wrong, but

rather what the parties would have agreed to themselves had

they considered the issue in their original bargaining positions at

the time of contracting. . . . [Fair dealing] is rather a

commitment to deal "fairly" in the sense of consistently with the

terms of the parties' agreement and its purpose. Likewise, "good

faith" does not envision loyalty to the contractual counterparty,

but rather faithfulness to the scope, purpose, and terms of the

parties' contract.

(Footnote Continued Next Page)

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The Gerber plaintiffs alleged that the general partner defendant

breached its express contractual duties and the implied covenant of good

faith and fair dealing under a limited partnership agreement. Specifically,

the plaintiffs pled that the general partner exercised its discretion to use the

special approval process in bad faith. The chancery court refused to permit

recovery on the breach of implied covenant theory; rather, it found the

implied covenant was only a “gap filler” that could not form the basis of a

claim based on conduct expressly authorized by a limited partnership

agreement.

The Delaware Supreme Court rejected that reasoning. It held that

“[w]hen exercising a discretionary right, a party to the contract must

exercise its discretion reasonably.” Gerber, supra at 419 (quoting ASB

Allegiance Real Estate Fund v. Scion Breckenridge Managing

Member, LLC, 50 A.3d 434, 442 (Del. Ch. 2012), aff'd in part, rev'd in part

on other grounds, 68 A.3d 665 (Del. 2013)). The court explained that an

implied covenant “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.” Gerber, supra

_______________________

(Footnote Continued)

Gerber v. Enterprise Products Holdings, LLC, 67 A.3d 400, 418-19 (Del

2013) (quoting ASB Allegiance Real Estate Fund v. Scion Breckenridge

Managing Member, LLC, 50 A.3d 434, 440-42 (Del. Ch. 2012), aff'd in

part, rev'd in part on other grounds, 68 A.3d 665 (Del. 2013).

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at 418. It protects the parties’ reasonable expectations by looking

retrospectively to discern what the parties would have agreed to had they

considered the issue in their original bargaining rather than at the time of

the breach. Thus, the court looked at the reasonable expectations of the

parties when contracting to see if the general partner acted unreasonably,

thereby frustrating the fruits of the bargain that Gerber reasonably

expected.

In Winshall, supra, the Supreme Court of Delaware explained the

limited scope and function of the implied covenant. The covenant cannot be

applied to afford the plaintiffs “contractual protections that ‘they failed to

secure for themselves at the bargaining table.’’’ Winshall, supra at 816

(quoting Aspen Advisors LLC v. United Artists Theatre Co., 861 A.2d

1251, 1260 (Del. 2004)). “Rather, a party may only invoke the protections

of the covenant when it is clear from the underlying contract that ‘the

contracting parties would have agreed to proscribe the act later complained

of . . . had they thought to negotiate with respect to the matter.’” Id.

(quoting Dunlap v. State Farm Fire & Cas. Co., 878 A.2d 434, 442 (Del.

2005)). In Winshall, the court refused to find an implied covenant in a

merger agreement to maximize post-merger earn-out payments to selling

shareholders, finding that the parties could and should have contracted for

that at the time of the merger.

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Pursuant to the LPA herein, T.R. White was responsible for managing

and controlling the limited partnership and it was given broad discretion in

doing so. It is the Hanaways’ contention, however, that they reasonably

expected that the general partner would not exercise that discretion in bad

faith by selling the assets of TPG at less than fair market value for its own

benefit and that of like-minded limited partners to their detriment and that

of TPG.9 The situation herein is much like the one in Gerber, supra, and

____________________________________________

9

The dissent takes the position that the covenant is not implied in every

contract, and in support thereof cites considerable authority including Cable

& Associates Ins. Agency, Inc. v. Commercial Nat. Bank of

Pennsylvania, 875 A.2d 361 (Pa.Super. 2005) for the proposition that no

covenant of good faith exists between lenders and borrowers. The dissent

misapprehends Cable. We held therein that there was no separate duty of

good faith between a lender and a borrower based on the legal relationship,

and no need to create one, “due to the existence of this ‘good faith’

cause of action sounding in contract.” Id. at 364 (emphasis added).

We acknowledged that a borrower could plead sufficient facts to state a

claim “that a lender violated its general duty of ‘good faith’ arising out of the

law of contracts.” Id.; see, e.g., Corestates Bank, N.A. v. Cutillo, 723

A.2d 1053 (Pa.Super. 1999).

Furthermore, the dissent contends that since an implied covenant cannot

trump the express language of a contract or impose additional terms. It

adds that no implied covenant exists in the instant case because the LPA

imposed specific limitations upon T.R. White’s discretion. We disagree. The

LPA expressly conferred upon T.R. White complete and exclusive discretion

in the management of TPG and the authority to buy and sell partnership

property. T.R. White pointed to that unfettered discretion in contending that

sale of the properties did not violate the terms of the LPA. See Motion for

Summary Judgment, at ¶¶60, 63 (maintaining that T.R. White did not

breach the contract as it was within its right to sell the properties by virtue

of its exclusive and complete discretion to manage the partnership). The

Hanaways denied that T.R. White had absolute discretion and averred that

(Footnote Continued Next Page)

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we find that reasoning persuasive.10 Despite the fact that the limited

partnership agreement therein expressly conferred discretion upon the

general partner to undertake the special approval process, the Delaware

court recognized an implied duty to exercise that discretion in good faith.

Herein, although T.R. White had discretion in the management of TPG and

the sale of the properties, the implied covenant of good faith and fair dealing

imposed a duty to exercise that contractual obligation in good faith. Thus,

we find that the implied covenants of good faith and fair dealing operate in

this circumstance and color the determination of whether T.R. White

breached the LPA.

_______________________

(Footnote Continued)

its conduct was bound by the covenants of good faith and fair dealing. See

Answer of Plaintiffs to the Defendants’ Motion for Partial Summary Judgment

on Counts I, II, and III of Plaintiffs’ Complaint, at ¶5. We agree that the

implied covenant operates to require T.R. White to perform its contractual

duties in good faith. Hence, in determining whether there has been a breach

of the LPA, T.R. White’s conduct must be viewed through that lens.

10

We recognize that the Delaware limited partnership statute is different

from Pennsylvania’s statute. Contrary to the dissent’s assertion, we are not

adopting Delaware law. Both states recognize an implied covenant of good

faith and fair dealing in contracts generally and recent Delaware cases offer

insight into how the covenant operates in the context of a limited

partnership agreement. We find Delaware’s view that the covenant does not

add new terms but acts to require a contracting party to exercise its

discretion reasonably and to protect the other party’s reasonable

expectations to be consistent with Pennsylvania’s view of such a covenant in

Baker v. Lafayette College, 504 A.2d 247 (Pa.Super. 1986), Somers v.

Somers, 613 A.2d 1211 (Pa.Super. 1992), Murphy v. Duquesne Univ. of

the Holy Ghost, 777 A.2d 418, 434 (Pa. 2001), John B. Conomos, Inc. v.

Sun Company, Inc., 831 A.2d 696 (Pa.Super. 2003), and the other

Pennsylvania cases cited herein.

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The only issue remaining is whether the record contains sufficient

evidence of such a breach to create a jury question. 11 In opposition to

summary judgment on their contract claim, the Hanaways proffered the

following evidence. On July 1, 2005, the Nolen Group expressed interest in

purchasing the Davis tract for a total consideration of $10,496,000.

Memorandum of Plaintiffs in Opposition to the Defendant’ Motion for

Summary Judgment, Exhibit 2. By correspondence dated July 21, 2005,

Heritage Land Group submitted a draft agreement for the purchase of 328

approved lots in the Davis tract for $9,500,000. Id. The Gambone

Development Company submitted a letter of intent to purchase the Davis

property for $38,000 per townhouse unit for 328 units. Id. The McKee

Group proposed a purchase of the Davis property, which it described as

sixty-one acres in Parkesburg Borough, consistent with both the Davis and

Loue tracts, for $21,325,000. Id. Ryan Homes expressed interest in

purchasing the 328 fully-improved townhome lots for $65,000 each, which

totals $21,320,000. TPG ultimately sold the Davis tract for $1.9 million and

____________________________________________

11

As the dissent correctly points out, T.R. White is only subject to liability in

contract for “intentional violation of any term of this Agreement.” LPA at §

6.9. The pleadings and the evidence, taken in the light most favorable to

the Hanaways, are sufficient to present a genuine issue of material fact as to

whether T.R. White intentionally violated the LPA.

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the Loue option for ten dollars, to PMP.12 T.R. White does not dispute that

PMP, a limited partnership consisting of all the partners of TPG with the

exception of the Hanaways, was formed with the intention of removing the

Hanaways from any interest in the Davis tract and Loue option.

Taking the evidence and its reasonable inferences in the light most

favorable to the Hanaways as we must do in reviewing the grant of summary

judgment, we find genuine issues of material fact that warrant submission of

this breach of contract claim to the factfinder. The evidence, if credited,

could support a finding that T. R. White orchestrated the sale of TPG’s assets

to PMP at a price that was below fair market value, that it did so for its own

benefit and that of the other limited partners, and to the financial detriment

of the Hanaways and TPG. The factfinder could reasonably find that this

conduct constituted a breach of T.R. White’s contractual duty to exercise its

discretion in the management of the limited partnership in good faith.

For the foregoing reasons, we affirm the grant of summary judgment

on the tort claims for conversion and breach of fiduciary duty based on the

statute of limitations. The Hanaways’ claim that the trial court erred in

dismissing their equity claims due to laches is waived since they failed to file

____________________________________________

12

T.R. White secured an appraisal of the value of the Davis and Loue tracts

in fee simple. As of the date of the sale, the tracts were appraised at

$2,700,000. PMP purchased the Davis Tract and the option for the Loue

Tract for $1.9 million and spent $800,000 to exercise the option to purchase

the Loue Tract.

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a post-trial motion pursuant to Pa.R.C.P. 227.1. However, we reverse the

grant of summary judgment on the contract claim for breach of the implied

covenant of good faith and fair dealing as to T.R. White, and remand for

further proceedings on that claim.

Judgment affirmed in part and reversed in part. Case remanded for

further proceedings consistent with this opinion. Jurisdiction relinquished.

Judge Stabile joins this Opinion.

Judge Donohue files a Concurring and Dissenting Opinion.

Judgment Entered.

Joseph D. Seletyn, Esq.

Prothonotary

Date: 12/15/2015

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