Non-Party’s ability to enforce a partnership agreement containing a buy-back provision
In re Estate of Caruso, 2022 WL 16943284 (Pa. Super.)(unreported), allocatur granted Aug. 21, 2023, appeal docket 14 WAP 2023
A general partnership known as the Hays Land Company (“HLC”) was formed by agreement executed in 1983 by Mary Ann Caruso (“Mary Ann”) and her two adult sons, John D. Caruso (“John”) and Peter J. Caruso, III (“Peter”) (“1983 Partnership Agreement”). Mary Ann sold her shares in HLC to John and Peter, in equal amounts, prior to her death in 1997. In 2003, John passed away and was survived by his wife Geraldine Caruso (“Geraldine”). The 1983 Partnership Agreement contains a buy-back provision in the event of the death of a partner:
If the partnership is dissolved by the death of a Partner, the remaining partners shall have the obligation within 90 days from the date of death of the deceased Partner to purchase the interest of the deceased Partner in the partnership and to pay to the personal representative of such deceased partner the value thereof as provided in paragraph 13 of this Agreement. During such 90-day period following the death of a Partner, the remaining Partners may continue the business of the Partnership, but the estate or personal representative of the deceased Partner shall not be liable for any obligations incurred in the Partnership business beyond the amount included in the estate of the deceased Partner already invested or involved in the Partnership on the date of the deceased Partner’s death. The estate of the deceased Partner shall be obligated to sell as provided herein and shall be entitled, at the election of the personal representative of the deceased partner, to either [a calculation of profits or interest from 90-day wind-up period] 1983 Partnership Agreement, ¶14.
Slip op. at 2. In its essence, the issue granted allocatur asks the Supreme Court to consider whether Geraldine had a clear right to enforce a written contract between her late husband, John, and her brother-in-law, Peter.
Superior Court summarized the relevant factual and procedural background as follows:
After John’s death, Peter, the remaining original HLC partner, did not exercise the buy-back provision. Instead, Peter and Geraldine continued to operate the business under the HLC name until April 2015, when Peter unilaterally drew up documents to merge HLC into a limited liability company, Hays Land Company-Pittsburgh, LLC.
In May 2015 Peter died, survived by his wife Sondra, who serves as the executrix of the Estate. Shortly thereafter, Geraldine attempted to execute the buy-back provision and calculated that she would owe Peter’s estate $117,762.50, based upon the book value of HLC, which is allegedly lower than the actual value. [Sandra Caruso, as executrix of the estate of Peter J. Caruso, III (“the Estate”)], would not accept payment and instead asserted that the 1983 Partnership Agreement was not in effect at the time of Peter’s death because the partnership had ended with John’s death in 2003.
Geraldine filed suit (“First Case”) claiming that the 1983 Partnership Agreement, and thus the buy-back provision, was still in effect, and Peter’s attempt to unilaterally form a limited liability company was invalid without her written consent. The trial court ultimately granted the Estate’s summary judgment motion, ruling that Geraldine could not prove her case due to the Dead Man’s Act. Essentially, the trial court held that because Geraldine could not testify about her dealings with Peter, she could not prove that she and Peter intended to continue to be governed by the 1983 Partnership Agreement nor could she show that she opposed the formation of a new limited liability company.
Slip op. at 2-3. The Superior Court in In re Estate of Caruso, 176 A.3d 346 (Pa. Super. 2017), held that the Estate failed to prove that Peter successfully executed a merger of HLC into a limited liability company, and reversed and remanded the case back to the trial court. Superior Court summarized the portions of its 2017 opinion relevant to decision on remand as follows:
…we concluded that there was ample evidence, even without Geraldine’s testimony about conversations with Peter, that Geraldine and Peter continued HLC after John’s death and knew they were still governed by the 1983 Partnership Agreement. Significantly here, in the First Case, this Court specifically concluded:
It is undisputed that the 1983 Partnership Agreement governed the HLC partnership of John and Peter. Although Executrix contends that the Partnership dissolved as a matter of law upon John’s death, the language of the Agreement suggests the contrary. The Agreement provided that the Partnership “shall continue until dissolved by mutual agreement of the parties or terminated as herein provided.” Partnership Agreement, at ¶ 3. The financial documents do not reflect that there was a settlement or liquidation of John’s interest as outlined in Paragraph fourteen of the Partnership Agreement.
* * *
We find support in the record for Geraldine’s contention that dissolution of the Partnership was not automatic upon John’s death. The Partnership was not terminated in accordance with the [1983 Partnership Agreement] following John’s death, i.e., there was no buy-out of John’s share that would have been mandatory following dissolution due to death of a partner. Partnership Agreement, ¶ 14. Such a course of conduct is compelling evidence that the parties intended to continue the partnership.
This inference is bolstered by the tax returns from 1998 through 2014, signed by Peter, that recite that HLC was formed in 1979, and reflect the same employer identification number for HLC for more than three decades. In addition, Peter’s admissions in the prior case that he and Geraldine were partners in the Hays Land Company, a Pennsylvania General Partnership, formed on or before December 12, 1983, which was the same partnership formed by John, Peter, and Mary Ann, is powerful evidence that the original partnership continued. While technically these are extra-judicial admissions, rather than judicial admissions that would eliminate the need for proof of these facts, they were unequivocal and made in circumstances where they were legally binding.
Id. at 353-55 (footnote omitted).
Slip op at 4-5. On remand, Geraldine sought an order that she was entitled to specific performance of the 1983 Partnership Agreement’s buy-back provision. The Estate countered that the original partnership had ceased and had been replaced by the limited liability company. The trial court entered an order in favor of Geraldine finding that the 1983 Partnership Agreement governed and directing specific performance of the buy-back provision. The Estate appealed, arguing, inter alia, that:
the trial court erroneously determined that Geraldine’s partnership interests were governed by the 1983 Partnership Agreement because she never signed it. It further contends that there was no evidence that Geraldine and Peter entered into an oral or written agreement that she was to become a party to the 1983 Partnership Agreement. The Estate maintains that there is no authority in Pennsylvania law that one can “step into the shoes” of a signatory to a contract. Further, the Estate avers that Geraldine offered no evidence of offer, mutual assent, or any consideration between her and Peter to support her claim that she became a de facto partner in HLC after her husband’s death.
Slip op. at 6-7.
Superior Court affirmed the trial court’s conclusion that Geraldine had the right to enforce the 1983 Partnership Agreement, reasoning that:
In this case, the trial court aptly concluded that the circumstances around both Geraldine’s and Peter’s course of conduct, following John’s death, established that Geraldine essentially “stepped into the shoes” of her Husband John, in regards to HLC. The parties do not dispute that the partnership between John and Peter was governed by the 1983 Partnership Agreement. However, Peter did not exercise the 1983 Partnership’s buy-back provision following John’s death. Instead, Peter and Geraldine continued to operate HLC together. In addition, compelling evidence of the continuing existence of the partnership would be HLC’s tax returns utilizing the same employer identification number throughout, signed by Peter from 1998 through 2014, which state that HLC was formed in 1979. Further, as this Court noted, Peter’s admission in a prior case that he and Geraldine were partners in HLC, a Pennsylvania General Partnership formed on or before December 12, 1983, was unequivocal evidence that the parties believed that the 1983 Partnership Agreement remained in effect. Indeed, the trial court specifically noted that Geraldine testified credibly that she relied on Peter’s pattern of conduct to believe that HLC and the 1983 Partnership Agreement endured. Tr. Ct. Rule 1925(a) Op., 1/26/22 at 7.
In light of the forgoing evidence, we conclude that the trial court did not abuse its discretion when concluding that the Estate and Geraldine were subject to the 1983 Partnership Agreement. See Jackson, 174 A.3d at 23. Peter and Geraldine’s conduct, after John’s death, indicated that they intended to continue HLC as partners, subject to the 1983 Partnership Agreement. See Murphy, 311 A.2d at 906-07; DeMarchis, 637 A.2d at 1034-35; 15 Pa.C.S.A. § 8329. In addition, we also find the Estate’s argument regarding insufficient contract formation between Geraldine and Peter to be of no moment. The course of conduct of both Geraldine and Peter indicates that the parties intended Geraldine to continue as a partner in HLC, subject to the 1983 Partnership Agreement. As such, no additional consideration was necessary.
Slip op. at 8-10.
The Pennsylvania Supreme Court granted allocatur to consider the following issue:
Where a non-party to a partnership agreement is not a signatory to the agreement and is not a third-party beneficiary of it and where a partnership agreement does not permit assignment, whether the Court’s review is necessary to clarify the circumstances where a non-party could be permitted to “step into the shoes” of a party to an agreement and to enforce contractual rights as if that individual were a party to the agreement.
For more information, contact Kevin McKeon or Dennis Whitaker.