Pennsylvania Limited Partnership Act; Forced Arbitration

MBC Development, LP v. Miller, 281 A.3d 332 (Pa. Super. 2022), allocatur granted Jan. 4, 2023, appeal docket 1 MAP 2023

Father (JLM) and son (Appellant) are limited partners in MBC Development, LP and MBC Properties, LP (the Partnerships). Specifically:

MBC Properties, LP is a Pennsylvania limited partnership founded in the 1970s by JLM and JLM’s brother. MBC Development, LP is a Pennsylvania limited partnership founded in 2002 by JLM and Appellant.  Miller Properties Management, LLC and MBC Management, LLC (collectively, the LLCs) are the respective general partners of MBC Properties, LP and MBC Development, LP. JLM owns more than fifty percent of each of the Partnerships and more than 99% of each of the LLCs.

Slip op. at 2 (internal record citations omitted). The partnership agreements of the Partnerships both contain the following arbitration clause:

Section 11.1 Mandatory Arbitration

A. Any 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 in effect at the time of submission to arbitration. Each Partner consents for himself or itself, and for his or its respective successors in interest, to the submission of any dispute or controversy hereunder to the arbitration process as aforesaid, where such submission is initiated by any other Partner (or that Partner’s successor in interest). The arbitration shall be conducted by a single arbitrator selected by the parties or, if they cannot agree, then the arbitrator or arbitrators shall be selected under the procedures of the American Arbitration Association.

B. All decisions of the arbitrator shall be final, binding and conclusive on all Partners (including any decision with regard to costs as set out below in Section 11.2, and no Partner (and no successor in interest) shall have a right of appeal from any such decision to any Court. However, solely for the purpose of implementing the arbitrator’s decision, judgment may be entered on the arbitrator’s award in any court having jurisdiction.

Slip op. at 2-3 (emphasis added by Superior Court). Relevant to this case, Sections 8692 and 8694 of the Pennsylvania Limited Partnership Act provide:

Section 8692 provides that:

a partner may maintain a derivative action to enforce a right of a limited partnership only if:

(1) the partner first makes a demand on the general partners requesting that they cause the partnership to bring an action to enforce the right, and:

(i) if a special litigation committee is not appointed under section 8694 (relating to special litigation committee), the partnership does not bring the action within a reasonable time; or

(ii) if a special litigation committee is appointed under section 8694, a determination is made:

(A) under section 8694(e)(1) that the partnership not object to the action; or

(B) under section 8694(e)(5)(i) that the plaintiff continue the action;

(2) demand is excused under subsection (b);

(3) the action is maintained for the limited purpose of seeking court review under section 8694(f); or

(4) the court has allowed the action to continue under the control of the plaintiff under section 8694(f)(3)(ii).

15 Pa.C.S. § 8692 (emphasis added). Section 8694 sets forth the procedures governing special litigation committees and the circumstances under which derivative claims may be litigated following a special litigation committee’s determination. 15 Pa.C.S. § 8694(a)-(f).

Slip op. at 10 (emphasis added by Superior Court).

Superior Court summarized the factual background as follows:

On July 16, 2019 and August 12, 2019, Appellant served written demands on the Partnerships and other entities not involved in this case asking that they bring legal actions against JLM. In response to these demands, the Partnerships and other entities invoked the special litigation committee process provided by Section 8694 of the Pennsylvania Uniform Limited Partnership Act of 2016 (the Limited Partnership Act), 15 Pa.C.S. § 8694, and appointed Cerullo and Kirwan as a special litigation committee (the SLC) to investigate and address the claims asserted in Appellant’s demands. On February 28, 2020 and August 31, 2020, the SLC issued reports addressing Appellant’s July and August 2019 demands and subsequent demands submitted by Appellant. In these reports, the SLC directed that the Partnerships take certain actions to address issues raised in Appellant’s demands, but concluded that no suit should be brought against JLM. Following the SLC’s February 28, 2020 report, the parties entered into an agreement tolling the statute of limitations on the claims in Appellant’s demands from February 28, 2020 through April 24, 2021.

On May 17, 2021, Appellant filed a demand for arbitration against the Partnerships, the LLCs, JLM, Cerullo, and Kirwan (collectively, Appellees) asserting derivative claims on behalf of the Partnerships against JLM for breach of the fiduciary duty that the general partner owes to the Partnerships and a direct claim against MBC Development, LP for failure to make a mandatory distribution to him. On June 2, 2021, Appellees filed a petition to permanently stay arbitration. In this petition, Appellees sought to stay the arbitration in toto on the ground that Appellant’s claims are challenges to the SLC determinations under Section 8694 of the Limited Partnership Act, not claims arising under or in connection with the Partnership Agreements, and on the ground that Section 8694 requires that a court determine whether a special litigation committee’s determination bars a derivative action. Appellees also sought, in the alternative, to permanently stay the arbitration as to Cerullo and Kirwan on the ground that they were not parties to any agreement to arbitrate.

Slip op. at 3-5 (internal citations omitted). The trial court entered an order permanently staying the arbitration, concluding that: the son’s derivative claims were within the scope of the Partnership Agreements’ arbitration clauses, but held that the son could not proceed with the arbitration because whether the SLC’s determination barred Appellant from bringing the derivative claims was a statutory claim that was not within the scope of the arbitration clauses and that Cerullo and Kirwan could not be compelled to arbitrate because they were not parties to the Partnership Agreements and never consented to arbitration. The trial court also held that the references in the Limited Partnership Act to “court review,” filing with “the court,” and “the court” making a determination concerning the special legal committee and its investigation, 15 Pa.C.S. § 8692(a)(3), (4); 15 Pa.C.S. § 8694(f), require that a court of common pleas, rather than an arbitrator, make the determination that the derivative action may proceed. Son appealed to Superior Court.

Superior Court held that whether the Limited Partnership Act permitted son to litigate his derivative claims was matter for the arbitrator to determine, and was not ground for denying or staying arbitration because son’s derivative claims were within the scope of the Partnerships’ arbitration agreement, and the determination required by Sections 8692 and 8694 of the Limited Partnership Act is a prerequisite and defense, rather than a cause of action. Superior Court reasoned:

Reference to a court as an adjudicator in a statute that applies to the plaintiff’s claim does not require that only a court can make such an adjudication or prohibit arbitration of the claim or issue. Saltzman [v. Thomas Jefferson University Hospitals, Inc., 166 A.3d 465, 474 (Pa. Super. 2017)] (reference to “court” in Whistleblower Law did not exclude Whistleblower claims from arbitration); Provenzano [v. Ohio Valley General Hospital, 121 A.3d 1085, 1099-1103 (Pa. Super. 2015)] (fact that Wage Payment and Collection Law (WPCL) provided that actions “may be maintained in any court of competent jurisdiction” and that “[t]he court” shall award certain relief did not preclude arbitration of WPCL claim that was within scope of arbitration agreement). Here, Sections 8692 and 8694 do not state that courts have exclusive jurisdiction over proceedings concerning the effect of a special litigation committee determination on a derivative claim. Rather, they simply refer to “the court” as the adjudicator of the effect of a special litigation committee determination where the action is brought in a court and refer to “court review” without any suggestion of intent to bar other adjudicators from addressing the issue.

Moreover, no other provisions of the Limited Partnership Act suggest that its references to a court as an adjudicator are intended to limit jurisdiction to courts or bar arbitrators from deciding such matters. Although the term “court” is defined as “the court of common pleas of the judicial district embracing the county where the registered office of the [entity] is or is to be located,” 15 Pa.C.S. § 102, comments to the Limited Partnership Act make clear that this definition and the references that the Limited Partnership Act makes to a “court” do not bar arbitrators from deciding issues where the partnership agreement provides for arbitration. 15 Pa.C.S. § 8681, comment to subsection (a)(6) (although subsection refers to an order of “the court” dissolving the partnership, such dissolution may be by an arbitrator if the partnership agreement provides for binding arbitration); 15 Pa.C.S. § 8615, comment to subsection (c)(15) (same).

Slip op. at 12-13.

The Pennsylvania Supreme Court granted allocatur as to the following issue:

Whether a limited partner can force arbitration of his challenges to a special litigation committee—despite the Limited Partnership Act’s mandate that a partnership agreement “may not . . . vary” the Act’s requirement that those challenges be subjected only to a “court review”?

For more information, contact Kevin McKeon or Dennis Whitaker.