AMM Blog

Welcome to the AMM Law Blog, a tool to help you keep up to date on current legal developments over the broad spectrum of our practice areas.  We welcome your comments and suggestions to create a dynamic forum that will be of interest to readers and participants.

By Gabriel Montemuro

 

Reprinted with permission from the February 28th edition of the The Legal Intelligencer © 2017 ALM Media Properties, LLC. All rights reserved.

Further duplication without permission is prohibited

The attorney-client privilege is the well-known and long-established court recognized protection of the substantive communications between an individual and his or her appointed counsel. The privilege protects litigants and their counsel from testifying or otherwise disclosing confidential communications between them despite the communications’ potential relevance or probative value. 42 Pa.C.S.A. § 5928; See also In re Grand Jury, 705 F.3d 133, 151 (3d. Cir. 2012). 

The attorney-client privilege is designed to foster a public policy that encourages clients to make full disclosure of facts to their attorneys and to allow counsel to properly, competently, and ethically carry out representation.  Idenix Pharm. V. Gilead Sci., Inc., 2016 WL 4060098 at 1 (D. Del. 2016).  The privilege further fosters full and frank communications between counsel and their clients, thereby promoting public interests in law and the administration of justice.  See J.N. S. W. School Dist., 55 F.Supp.3d 589, 598 (M.D. Pa. 2014); See also Magnetar Tech. Corp. v. Six Flags Theme Park Inc., 886 F.Supp.2d 466, 477 (D. Del. 2012).

The attorney-client privilege is widely recognized as a nearly insurmountable bar to discovery, however confidential communications between an attorney and his or her client may still be discoverable in limited circumstances.  The privilege may be waived, either expressly by consent or implicitly by disclosing communications at issue to a third party, or by failing to timely assert the privilege.  See Serrano v. Chesapeake Appalachia, LLC, 298 F.R.D. 271, 284 (W.D. Pa. 2014); see also Law Office of Phila. Waterfront Partners, 957 A.2d 1223, 1233 (Pa. Super. 2008); Nationwide Mut. Ins. Co. v. Fleming, 924 A.2d 1259, 1265 (Pa. Super. 2007).

Prior to Pennsylvania legally recognizing same-sex marriages, other states did offer same-sex marriages or civil unions. A problem for couples who entered into an out-of-state marriage or civil union was that if they later decided to divorce, they could not do so in the Pennsylvania family courts.  This was because Pennsylvania did not recognize those marriages or civil unions as legal.  In June 2013, in United States v. Windsor, the United States Supreme Court ruled that the Defense of Marriage Act’s (DOMA) defining marriage as between one man and one woman was unconstitutional, but the Court limited the impact of their decision.  In May 2014, the United States District Court for the Middle District of Pennsylvania ruled in Whitewood v. Wolf that Pennsylvania’s definition of marriage and refusal to recognize out-of-state same-sex marriages were unconstitutional.  Then, in June 2015, the United Stated Supreme Court in Obergefell v. Hodges ruled that same-sex couples must have the right to marry.  This decision applies to every state.

While these decisions expanded rights to same-sex couples, a lot of questions were left unanswered.  One of the big questions was whether civil unions entered into in other states prior to the legalization of same-sex marriage would be recognized by Pennsylvania.  If the civil unions were not recognized as legal marriages, then Pennsylvania courts did not have to grant divorces, divide the assets and liabilities through equitable distribution or address support issues There were potential child custody ramifications as well.  This left Pennsylvania same-sex couples who legally entered into out-of-state civil unions without the ability to divorce or deal with the economics related to their marriage through the family courts in their home state. 

On December 28, 2016, the Superior Court of Pennsylvania addressed this question in Neyman v. Buckley.  The Superior Court of Pennsylvania ruled “that a Vermont civil union creates the functional equivalent of marriage for the purposes of dissolution.”  In this case, the parties, Pennsylvania residents, entered into a Vermont civil union in 2002 and separated later that year.  From 2014 through 2015 the parties unsuccessfully sought a divorce in Pennsylvania and appealed their case to the Pennsylvania Superior Court arguing that the Pennsylvania family court should have jurisdiction to dissolve their Vermont civil union and that the Vermont civil union should be treated as a legal marriage in Pennsylvania.  It is important to note that Vermont intended same-sex couples that entered into civil unions to have the same rights and access to the family court system as those who were married.  The Superior Court of Pennsylvania used this reasoning to “conclude that the legal properties of a Vermont civil union weigh in favor of recognizing such unions as the legal equivalent of marriage for purposes of dissolution under the Divorce Code.”  This decision allows same-sex couples who entered into out-of-state civil unions the same rights as if the civil union were a marriage.  It also allows these couples access to Pennsylvania family courts to address those issues permitted under the Pennsylvania Divorce Code.

Reprinted with permission from the December 30, 2016 issue of The Legal Intelligencer. (c) 2016 ALM Media Properties. Further duplication without permission is prohibited.

Historically, the courts of the Commonwealth of Pennsylvania have been loathe to blur the distinction between tort and contract.  The gist of the action doctrine, well formed and frequently litigated, precludes  recasting contract claims as tort claims or claims of negligent performance of contractual duties.  The courts have specifically held that parties to business agreements such as partnership, shareholder or LLC operating agreements may contract away or severely limit fiduciary duties owed by partners, directors and managers.  Notwithstanding these long standing and often contested principles of law, the Pennsylvania Supreme Court is set to address an emergent trend toward the expansion of duties imposed by contract through the implication of the duty of good faith and fair dealing in the context of business relationships.  Specifically, the Court has granted allocator on the issue of whether “the implied covenant of good faith and fair dealing” applies to “all limited partnership agreements under Pennsylvania law.”  Assuming the Court answers the question in the affirmative, as have the Courts in neighboring Delaware in a similar cases involving business governance agreements, the bright line between tort and contract will dim.

The case of Hanaway v. Parkersburg Group, L.P. 132 A.3d. 461 (Pa. Super. 2015) arises out of a limited partnership agreement for the development and sale of real estate.  The complaint alleges various breaches of fiduciary duty, conversion and contract based on the general partner’s sale of real estate at below market value to a separate entity also controlled by the general partner and involving many of the same limited partners as had invested in the original limited partnership – to the exclusion of the plaintiffs.  All tort claims based on breach of fiduciary duty were found to be time barred.   Further, the trial court granted summary judgment on the contract claims.  On appeal to the Superior Court, plaintiffs argued that the trial court erred in granting summary judgment on breach of contract claims by finding that the provisions of the limited partnership agreement granting the general partner exclusive right to manage the business affairs of the partnership negated the duty of good faith and fair dealing.  Plaintiffs argued the covenant is implied in every contract and imposes on each party a duty of good faith and fair dealing in its performance and enforcement, notwithstanding the grant of exclusive management rights.  

The Superior Court held that the implied covenant of good faith and fair dealing imposed the duty to exercise a contractual obligation, even a contractual obligation expressly conferring the exercise of discretion, must be exercised in good faith.  “Good faith” was interpreted 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”.  The Court went on to describe the implied duty as requiring “honesty in fact in the conduct of the transaction concerned”.   Thus, the Court concluded that the general partner’s sale of partnership assets at below market rate for its own benefit and the benefit of its like minded limited partners to the detriment of others may constitute a breach of the implied duty and an issue for trial which should not have been dismissed on summary judgment.   

The Pennsylvania Supreme Court’s impending decision will undoubtedly be guided by precedent from the Delaware Supreme Court and the statutory preservation of the duty of good faith and fair dealing even in the face of the right to contract including the right to limit other duties- even fiduciary duties.   Delaware has adopted both a Revised Uniform Limited Partnership Act and a Limited Liability Company Act which permit parties to business agreements within the scope of those Acts to limit fiduciary duties owed to each other and the business. The Limited Liability Company Act goes so far as to confirm the premise that managers in an LLC owe fiduciary duties to each other under law by default, but allows for modification of such duties in the  operating agreement. The Revised Uniform Partnership Act, while allowing for a contractual waiver of fiduciary duties, specifically rejects waiver of the covenant of good faith and fair dealing.  Accordingly, while the parties are free to modify the fiduciary relationship with regard to management of business entities traditionally governed by contract, the implied covenant of good faith and fair dealing remains.  That premise was confirmed by the Delaware Supreme Court in Gerber v. Enterprise Products Holdings, LLC 67 A.3d 400 (Del. 2013).    In Gerber, the Supreme Court explained that the implied covenant “seeks to enforce the parties’ contractual bargain by implying only those terms the parties would have agreed to during their original negotiations had they thought to address them”. Gerber, at 418.  

The blending of tort and contract in the Pennsylvania Superior Court’s analysis in Hanaway is clearly evident by the Court’s summary conclusion that the breach of contract claims should have been preserved for the jury.  Although directly addressing the breach of contract claim, the Court applied tort principles by finding that the evidence, if credited, could support a finding that the Defendant orchestrated the sale of partnership assets at a price below market value for its own benefit.  The Court then concluded  such sale could have constituted a breach of the contractual duty to exercise management of the limited partnership in “good faith”.  Hanaway, 132 A.3d at 476.

A Supreme Court opinion which imposes the duty of good faith and fair dealing to all agreements governing business relationships will have far reaching implications.  Clearly, if breach of contract can be successfully alleged in a business setting under circumstances described in Hanaway, the statute of limitations analysis is substantially modified.  Owners of a minority business interest may no longer be limited to a two year statute.  Business practitioners and drafters of organizational documents who once believed a disclaimer of fiduciary duty was sufficient must now reconsider the inclusion of a “good faith” definition.  For litigators, the permissible theories of damage claims in business disputes concerning internal governance documents are expanded.

Although the Hanaway Superior Court decision is at odds with many traditional notions of separation between tort and contract, any Supreme Court determination that excludes the principal of good faith and fair dealing from business agreements would be at odds with the overarching and recognized principle that the duty is “implied in every contract”.  Further, any such ruling would be at odds with recent precedent from the Supreme Court of Delaware. 

Tom Donnelly is a Partner of the firm. His practice focuses primarily on commercial litigation and transactions, employment disputes and personal injury.  To learn more about the firm or Tom Donnelly, visit www.ammlaw.com.
   
 

 "The secret to change is to focus all of your energy, not on fighting the old, but on building the new.
- Dan Millman, “Way of the Peaceful Warrior: A Book That Changes Lives”


People make resolutions to start off the New Year, such as dieting, giving up smoking, saving money and making more money. As we begin 2017, a common resolution on the minds of many is to get a divorce.

Oftentimes, this “resolution” was made earlier in the year, but there was a decision, or even a discussion, to not do anything until after the holidays. 

Making the decision to end your marriage is the first step.  Then, there is the actual process.  The next step is to get yourself organized.  If you have access to records regarding your assets, liabilities and income, get them.  You should photocopy them and keep them somewhere safe.  (The safest place is in the home of a friend or somewhere your spouse does not have access.)  If you do not have access to that information, do not panic.  You will be able to obtain the information during the divorce process.

After you are organized, get legal advice from an attorney in the area in which you live.  Do not rely on the advice of friends and family.  In particular, do not rely on information about divorces on the internet.  There is a lot of misinformation on the internet.  Divorces and their outcomes tend to vary from person to person based upon their circumstances.  Get advice tailored to your circumstances.

Lastly, be reminded that you are not the only one in your divorce.  It involves your spouse, your children, your in-laws, your friends and neighbors.  You will find yourself in unfamiliar territory.  However, if you remember that you are making this resolution for a reason, you will manage your divorce with dignity, and soon find yourself on the other side.

Most people believe that they have plenty of time before they have to start considering their 2016 taxes to be filed in 2017, and for most, the tax return process is not something they just can’t wait to get started.  That being said,  if you are separated or in the process of a divorce, now is the time to start thinking about your tax filing status for your 2016 income tax returns.  Some thoughtful planning and discussion now can go a long way in avoiding stressful emergency issues in the weeks leading up to April 15th, and instead provide adequate time to address and resolve any concerns.  If you are separated but not divorced by December 31, 2016, you have a few different options of how you can file your taxes: married filing jointly, married filing separately or perhaps even head of household.  You cannot file single if you are not divorced in 2016.

The reason to start thinking about your 2016 tax filing status now is that if you want to file as married filing jointly, your spouse must agree.  Now is the time to speak to your accountant to determine the most advantageous tax filing status.  You should also decide if there are any concerns that you have that would prevent you from choosing one of the options.  If you and your accountant determine that married filing jointly is the best option, and your spouse disagrees, you will have time to involve the attorneys and work towards an agreement as to tax filing status.  In many cases, an Agreement to File Joint Income Tax Returns/Tax Indemnification Agreement is the best way to proceed in order to set forth each spouses’ responsibilities in terms of preparing and filing the returns, addressing any taxes due or refunds that might be received, and to protect you from any potential tax liability related to your spouse.

You can set yourself up for a less stressful tax season in 2017 by starting the discussion now. 

Admittedly, insurance is an important part of any business plan.  Protecting against a catastrophic loss occasioned from outside factors renders the premium cost a reasonable and justifiable expense. But it is important to understand that commercial general liability insurance is not a substitute for performance, nor will insurance provide any benefit with regard to a myriad of potential claims which commonly arise in the ordinary course of business.  It is important to understand what protections are acquired and the scope of the coverage.

For example, commercial general liability insurance provides no coverage for any breach of contract claim.  Generally, the insurance benefit applies only to an “occurrence”; which, under Pennsylvania law is defined as an “accident”.  If your business fails to perform on a contract, or deliver on a promise, there has been no occurrence, and therefore no coverage will generally apply. 

Further, most basic commercial general liability policies provide no coverage for “your work” meaning no coverage is provided with respect to the products you manufacture or the things you build.  For example, if your business is engaged in the design and construction of a manufacturing line and that manufacturing line malfunctions causing damage only to itself, no coverage will apply.  In contrast, if the manufacturing line were to malfunction causing damage to the property where it was installed, those damages may be covered.  Similarly, if the manufacturing line were to malfunction causing a loss of product, those damages may likewise be covered.     

As with any contract, the scope of commercial general liability coverage and exclusion is defined by the terms of the policy.  Under Pennsylvania law, as the policies of insurance are drafted by the insurers and offered to policy holders without modification, the provisions of those policies are interpreted in a light most favorable to the insured.  Traditional common law precedent relating to contract interpretation are also applicable.  

Many particular risks which may be excluded from coverage under a basic commercial general liability policy may be subject to additional coverages available by endorsement.  Although tedious, review of the often complicated and lengthy provisions of the policy of insurance with the issuing agent is the only way to gain even a rudimentary understanding of coverages.  Even then, a professional review is often worth the investment.   There is simply no substitute for an understanding of the relationship between the business risks and the provisions of the commercial general liability policy and an analysis of additional risk that may be insured by endorsement to the policy.     

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