MBC Dev. v. Miller

316 A.3d 51

MBC DEVELOPMENT, LP, MBC Management, LLC, MBC Properties, LP, James L. Miller, Miller Properties Management, LLC, Martin Cerullo, William Kirwan

v.James W. MILLER

Appeal of: MBC Development, LP, MBC Management, LLC, MBC Properties, LP, James L. Miller, and Miller Properties Management, LLC

No. 1 MAP 2023

Supreme Court of Pennsylvania.

Argued: September 13, 2023

Decided: May 31, 2024

Appeal from the Order of the Superior Court dated August 12, 2022 at No. 1295 MDA 2021 Vacating in Part/Affirming In Part the Order of the Schuylkill County Court of Common Pleas, Civil Division, dated September 28, 2021 at No. S-797- 2021 and Remanding. Christina E. Hale, Judge

Karl Stewart Myers, Esq., Stacey Ann Scrivani, Esq., Elizabeth Anne Ware, Esq., Stevens & Lee, for Appellants MBC Development LP, MBC Management LLC, MBC Properties LP, James L. Miller & Miller Properties Management LLC.

Dean F. Piermattei, Esq., Jill Neary Weikert, Esq., for Appellee James W. Miller.

TODD, C.J., DONOHUE, DOUGHERTY, WECHT, MUNDY, BROBSON, JJ.

OPINION

JUSTICE MUNDY

We granted allowance of appeal to consider whether a limited partner may invoke the mandatory arbitration provision in the limited partnership agreements to compel arbitration of his challenges to a special litigation committee’s recommendation. Because we conclude the limited partnerships’ agreements incorporated the Pennsylvania Uniform Limited Partnership Act of 2016 (PULPA), 15 Pa.C.S. §§ 8611-8695, which clearly and unambiguously provides for judicial review of a special litigation committee’s recommendation, we reverse the Superior Court’s decision concluding an arbitrator could conduct the review of the special litigation committee’s determination.

I. FACTUAL AND PROCEDURAL HISTORY

James W. Miller (Appellee) and his father James L. Miller (JLM) are two of the limited partners in MBC Properties, LP and MBC Development, LP (LPs), two entities engaged in real estate development, investment, acquisition, and management.¹ The general partners are two limited liability corporations, MBC Management, LLC and Miller Properties Management, LLC (LLCs), of which JLM owns more than 99%. JLM founded the LPs and LLCs and selves as the managing member of the LLCs. As relevant to this appeal, the limited partnership agreements contain a mandatory arbitration clause providing, in part, "[a]ny dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in accordance with the rules of the American Arbitration Association." Limited Partnership Agreement of MBC Development, LP, 5/14/02, at 23-24, § 11.1 (R.R. at 109-10a); Limited Partnership Agreement of MBC Properties, LP, 8/1/11, at 26, § 11.1 (R.R. at 140a).² The limited partnership agree- ments also contain a choice-of-law provision stating "[t]his Agreement shall be construed and enforced in accordance with the laws of the State of Pennsylvania." Limited Partnership Agreement of MBC Development, LP, 5/14/02, at 25, § 12.6 (R.R. at 109-10a); Limited Partnership Agreement of MBC Properties, LP, 8/1/11, at 26, § 12.6 (R.R. at 140a).

On July 16, 2019 and August 12, 2019, Appellee in capacity as a limited partner served written demands on the LPs, pursuant to Section 8692 of the PULPA, 15 Pa.C.S. § 8692.³ The demands requested that the partnerships bring actions to enforce the partnerships' rights relating to breaches of the partnership agreements, breaches of fiduciary duty, and sought other equitable relief, including an accounting. Appellee supplemented the initial demand letters in late 2019 and early 2020.

In response to Appellee’s demands, on July 18, 2019 and August 13, 2019, the LPs notified Appellee that they were appointing a special litigation committee (SLC) under Section 8694 of PULPA, 15 Pa.C.S. § 8694, to investigate the claims and determine if it was in the LPs’ best interests to pursue the claims.⁴ Accordingly, the LPs appointed Martin J. Cerullo, Esq. and William E. Kirwan, Esq., CPA to serve as the members of the SLC. Following its investigation, the SLC issued a final report on February 28, 2020, recommending that the partnerships take certain actions to address Appellee’s issues but ultimately con- cluding the partnerships should not pursue any action against JLM or any other third parties. Report of the SLC, 2/28/20, at 41 (R.R. 222a) (explaining "[t]he majority of the claims raised by [Appellee] are either barred by the applicable statute of limitations or do not otherwise establish that the general partner or manager was acting recklessly and/or willfully."). Additionally, as relevant to this appeal, the SLC’s report included a footnote stating its position was that an arbitrator would review its determination even though the PULPA expressly provides for court review:

The Pennsylvania statutes discuss the review undertaken by a court.. As discussed in Section V.D., infra,⁵ any review conducted in this case will be made by an arbitrator. Even though any review will be conducted by an arbitrator, the SLC uses "court" here because that is the language of the statute and for ease of reference.

Report of the SLC, 2/28/20, at 2 n.3 (R.R. at 183a).

As alluded to by the SLC report, Section 8694(c) of the PULPA requires that an SLC "shall be composed of two or more individuals who: (1) are not interested in the claims asserted in the demand or action; (2) are capable as a group of objective judgment in the circumstances; and (3) may, but need not, be general or limited partners." 15 Pa.C.S. § 8694(c). After an SLC issues a determination that it is in the best interests of the limited partnership that "an action not be brought based on any of the claims asserted in the demand," 15 Pa.C.S. § 8694(e)(4), Section 8694(f) provides for limited review of that determination as follows:

(f) Court review and action.--If a special litigation committee is appointed and an action is commenced before a determination is made under subsection (e):

(1) The limited partnership shall file with the court after a determination is made under subsection (e) a statement of the determination and a report of the committee. The partnership shall serve each party with a copy of the determination and report. If the partnership moves to file the report under seal, the report shall be served on the parties subject to an appropriate stipulation agreed to by the parties or a protective order issued by the court.

(2) The partnership shall file with the court a motion, pleading or notice consistent with the determination under subsection (e).

(3) If the determination is one described in subsection (e)(2), (3), (4), (5)(ii), (6) or (7), the court shall determine whether the members of the committee met the qualifications required under subsection (c)(1) and (2) and whether the committee conducted its investigation and made its recommendation in good faith, independently and with reasonable care. If the court finds that the members of the committee met the qualifications required under subsection (c)(1) and (2) and that the committee acted in good faith, independently and with reasonable care, the court shall enforce the determination of the committee. Otherwise, the court shall:

(i) dissolve any stay of discovery entered under subsection (b);

(ii) allow the action to continue under the control of the plaintiff; and (iii) permit the defendants to file preliminary objections and other appropriate motions and pleadings.

15 Pa.C.S. § 8694(f), Pa. Pub. Act. No. 2016-170 (H.B. No. 1398) (amended by Pa. Pub. Act No. 2022-122, § 103 (H.B. No. 2057) (Nov. 3, 2022)).⁶ Additionally, Section 8692(a) states that a plaintiff "may maintain a derivative action to enforce a right of a limited partnership only if," inter alia, "the action is maintained for the limited purpose of seeking court review under section 8694(f)[.]" 15 Pa.C.S. § 8692(a)(3). Moreover, Section 8615(c)(18) provides that a partnership agreement may not "[v]ary the provisions of section 8694 (relating to special litigation committee), except that the partnership agreement may provide that the partnership may not have a special litigation committee." 15 Pa.C.S. § 8615(c)(18).⁷

In this case, after the SLC issued its report, Appellee filed a demand for arbitration on May 17, 2021 with the American Arbitration Association (AAA) asserting derivative claims, including a request for the arbitrator to determine whether the SLC complied with Section 8694(f). Demand for Arbitration at 10-11 (R.R. at 46a-47a). In response, on June 2, 2021, the LPs, LLCs, JLM, Cerullo, and Kirwan filed a petition to permanently stay arbitration pursuant to 42 Pa.C.S. § 7304 in the Court of Common Pleas of Schuylkill County. The petition to stay asserted that the AAA lacked subject matter jurisdiction over Appellee’s claims because those claims arose by statute, not under or in connection with the limited partnership agreements. Pet. to Permanently Stay Arbitration, 6/2/21, at 2, ¶ 5 (R.R. at 14a). Further, the petition to stay argued that any review of the SLC determination must be litigated in a court of common pleas. Id. at 3, ¶ 7 (R.R. at 15a).

On September 28, 2021, the final court granted the petition to permanently stay the arbitration, concluding that Appellee's challenge to the SLC report arose statutorily and not under the limited partnership agreements. Trial Ct. Op., 9/28/21, at 12. The trial court began its analysis by noting that under 42 Pa.C.S. § 7304, a final court may stay an arbitration "on a showing that there is no agreement to arbitrate." Id. at 4 (quoting 42 Pa.C.S. § 7304). The trial court explained that when confronted with a petition to stay arbitration, the law circumscribes a court’s review to only: (1) whether the parties have a valid arbitration agreement; and (2) whether the dispute is within the scope of the arbitration provision. Id. at 5. Additionally, the court noted arbitration agreements must be strictly construed and any doubts or...