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.     

Employers have been working to comply with new overtime rules issued by the United States Department of Labor that raise the salary level in order to meet certain exemptions from overtime rules before a December 1, 2016 deadline.  Those rules require that in addition to meeting certain requirements with regard to an employee’s duties, the employee must also earn a minimum salary of $47,476.  The old rule required that the employee earn a minimum salary of $23,660.  The dramatic increase in the salary requirement caused employers to reevaluate classifications and to generate new policies regarding overtime and work hours.

 On November 22, 2016, the United States District Court for the Eastern District of Texas issued a preliminary injunction, temporarily barring the Department of Labor from enforcing the new overtime rule.  The order will remain in place pending a full hearing on the issue.  While the order is temporary, as a prerequisite to entering the order, the Court was required to find that there was a substantial likelihood of success on the merits of the argument that the DOL exceeded its authority in promulgating the rule.  So, there is some indication that the Court may bar enforcement of the new rules permanently. 

 For now, employers are temporarily relieved of the obligation to comply with the new rules by the December 1, 2016 deadline.  Because the outcome is not guaranteed, employers should have their new policies ready to go, but do not need to implement them on December 1.  It is simply too early to say whether employers should “shelve” those new policies.  We will have to wait for the Court’s final ruling.   Stay tuned to this space as the case unfolds. 

Patricia Collins is an employment and litigation Partner at Antheil Maslow & MacMinn, LLP and chair of the labor and employment practice group.

The law requires drivers in the Commonwealth of Pennsylvania and New Jersey to maintain a certain minimum level of liability coverage with regard to any automobile.  That coverage serves the important function of providing a fund from which an injured person may recover for injuries caused by the negligence of the person securing the coverage known as the “insured”.  Liability coverage also serves the equally important role of protecting the insured’s personal assets by providing a monetary barrier between the claims of an injured person and the personal assets of the insured  

Some other provisions of an automobile policy which get far less attention, however, are also designed to protect the insured as opposed to someone injured by the insured’s negligence.  Policy provisions such as “stacking”, the limited tort option (known in New Jersey as the “verbal threshold”) and uninsured/underinsured protections are critically important to the insuring relationship and may be the difference between a successful recovery and a recovery which is not enough to satisfy your own medical bills, even if you are involved in an accident caused by the negligence of someone else.  “Penny wise and pound foolish” is a dangerous proposition when it comes to automobile coverage.

We recently and successfully tried a week long jury trial in the Bucks County Court of Common Pleas where the predominant issue in the case was the clients’ election of the limited tort option in his auto insurance policy. By choosing the limited tort option, the client had relinquished his right to bring suit against anyone whose negligence may have caused him to be injured,  unless the accident resulted in a “serious impairment of a bodily function”.  In our case, the client had suffered a mild traumatic brain injury – a concussion.  Unlike the majority of individuals who suffer such injuries, our client did not recover as expected, and continued to suffer mild neuropsychological deficits such as difficulty in word finding and rapid processing of information. Notwithstanding those deficits, the client was able to return to his normal occupation.  Because our client had chosen the limited tort option, the tortfeasor’s insurer refused to make any offer of settlement whatsoever based on his neuropsychological deficits, offering only to satisfy the client’s lost wages.  Our negotiating position on behalf of our client in settlement discussions was clearly disadvantaged since the insurance company knew there was substantial potential that the very specific and nuanced nature of the injury would be difficult for a jury to grasp, and might lead a jury to conclude the client had not suffered a “serious impairment of a bodily function”.  While we were successful at trial, the matter is one which should and would have been resolved in settlement but for the election of limited tort coverage by the client.  Had our client invested in full tort coverage, he would have been spared an emotionally taxing and all-consuming trial on merits and damages.