### 2001 D e c i sion s O p inion s of the U nit e d

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P r e c e de n t i al or N on-P r e c e de n t i al :

D ock e t 00-3607

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. e du/thir dc ir c uit_2001/261Filed November 8, 2001

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 00-3607

JOSPEH HUANG; JULIA Y. HUANG,

v.

BP AMOCO CORPORATION

Joseph Huang; Julia Huang, Appellants

On Appeal From the United States District Court for the Eastern District of Pennsylvania (D.C. No. 00-CV-01290) District Judge: Honorable Clarence C. Newcomer

Argued: August 2, 2001

Before: MCKEE, AMBRO, and GREENBERG, Circuit Judges

(Filed: November 8, 2001)

Kenneth J. Fleisher (Argued)
E. Harris Baum Zarwin, Baum, DeVito, Kaplan,

O'Donnell & Schaer 1515 Market Street, Suite 1200 Philadelphia, PA 19102

Attorneys for AppellantsWilliam A. DeStefano (Argued)

Jeffrey M. Viola Maura F. Ratigan Saul Ewing LLP

1500 Market Street Centre Square West, 38th Floor Philadelphia, PA 19102

Attorneys for Appellee

OPINION OF THE COURT

AMBRO, Circuit Judge:

In this diversity action alleging breach of a comme rcial property lease under Pennsylvania law, appellants J oseph and Julia Y. Huang (collectively, the "Huangs" or " Lessor") appeal an order by the United States District Court for the Eastern District of Pennsylvania ("the District Cou rt") granting summary judgment in favor of appellee BP A moco Corporation ("BP Amoco"), the successor in interest of Amoco Oil Company ("Amoco" or "Lessee"). We conclud e that by making the unsupported factual assumption t hat Amoco could not apply for contractually required Government approvals until it procured satisfactory agreements with third-party co-developers, the Dist rict Court unjustifiably allowed BP Amoco to flout its i mplied covenant of good faith and fair dealing.

I. Factual and Procedural History

On September 21, 1998, Amoco by written agreement ("the Lease") leased a commercial property in Phila delphia from the Huangs for fifteen years. The Lease allowe d Amoco to make improvements to the property for the purpos e of operating a "retail gasoline facility" or"for any [ other] lawful purpose." Under section 2 of the Lease, no rent was due until Amoco sold gasoline from the property.

The crucial provisions for our purposes are in subsections 7(b) and 7(c), and S 19, of the Lease. Subsection 7(b) gave Amoco 180 days to obtain "appr ovals"

2from various government authorities for any improve ments

to the property, subject to thirty-day extensions a t the Huangs' option:

Lessee shall apply for appropriate zoning an d for issuance from the proper municipal, county, state and other duly constituted authorities such unco nditional Approvals and permits . . . (collectively "t he Approvals") satisfactory to Lessee, in its sole discreti on, for the razing of improvements, construction of impr ovements and installation of equipment for a retail g asoline facility and for the operation and maintenan ce of such facility. . . . Lessee shall not be deemed t o be in default of any provision relating to the Approvals a s long as the pursuit of the administrative, legal or equi table proceedings shall be diligently carried out by Lessee.

. . .

It is agreed by Lessee that it shall obtain the Approvals, or denial, within 180 days of the full execution of the Lease. In the event the App rovals, or denial, are not received by Lessee within th e 180 days, Lessor shall have the option, at his sole di scretion, of extending the period for an additional thirt y (30) days, and granting additional thirty (30) day peri ods thereafter until the Approvals or denial are received, or canceling this Lease.

Section 19 reiterated that Amoco was required to ob tain the Approvals: "In reliance on Lessor's representations
, warranties and covenants set forth herein, Lessee w ill obligate itself to expend sums to, without limitati on, . . . obtain the Approvals."

Subsection 7(c)1 listed situations in which Amoco c ould

___________________________________________________ ______________

1. Subsection 7(c) reads in full:

In the event Lessee shall be unable to obtai n the Approvals, or any thereof; or in the event the Approvals, or a ny thereof, if obtained,
shall be afterward revoked without fault of Lessee, or its assignee

or sublessee; or in the event Lessee shall be u nable to enter into an agreement satisfactory to Lessee, in its sol e discretion, for the

co- development with a third party quick-service restaurant and satisfying all conditions and contingencies in that agreement; or

in

3terminate the Lease without incurring liability. Th ree of

these situations are relevant here. First, it could terminate the Lease if one of the required Approvals were den ied. Second, Amoco could terminate the Lease if it were" unable to enter into an agreement satisfactory to Lessee, in its sole discretion, for the co-development with a third par ty quickservice restaurant. . . ." Third, "[i]f for any rea son [Amoco] has not obtained the Approvals within six (6) month s after the date of execution of this Lease by both Lessor and Lessee, then Lessee may, at Lessee's discretion, te rminate this Lease as though the Approvals, of any thereof, had
been denied."

Six months after signing the Lease, BP Amoco had ma de no efforts to obtain the required Approvals. On Mar ch 19, 1999, BP Amoco and the Huangs agreed to extend the 180- day period for obtaining Approvals to April 20, 199 9. On April 19, 1999, still having made no effort to obta in any Approvals, BP Amoco sent a letter to the Huangs sta ting that it "has not obtained the Approvals required by Section 7 . . . within the prescribed 180-day period as ext ended to April 20, 1999," and "[a]ccordingly, pursuant to Se ction 7(c) . . . hereby exercises its privilege of terminating [the Lease]." On neither March 19 nor April 19 did BP Amoco claim that its ability to seek the Approvals was contingent up on its procuring satisfactory third-party co-developer agr eements.

___________________________________________________ ______________

the event necessary utility connections (inc luding but not limited

to electricity, natural gas, sanitary and storm sewer, telephone and water hookups) adequate in Lessee's sole jud gment are unavailable at the property line or in the adjoining rig ht-of-way to serve the Demised Premises for a standard "tap-on" fee ; or if Lessee, its assignee or sublessee shall be restrained or enjoined from conducting its business and maintaining its improvements, driveways and equipment; then and in any or either of such events, Lessee shall have the privilege of terminati ng this Lease by giving Lessor ten (10) days' notice of its intentio n so to do, and shall thereupon be relieved of all liability hereu nder. If for any reason Lessee has not obtained the Approvals within six (6) months after the date of execution of this Lease by both Lessor and Lessee, then Lessee may, at Lessee's discretion, terminat e this Lease as though the Approvals, or any thereof, had been deni ed.

4Indeed, on neither occasion did BP Amoco even menti on its

inability to reach such agreements.

After BP Amoco announced that it was terminating th e Lease despite occupying the property rent-free for seven months, the Huangs brought suit in the District Cou rt and filed a motion for summary judgment. BP Amoco respo nded with a cross-motion for summary judgment, and the District Court entered summary judgment for it. The District Court found that subsection 7(c), "in clea r and unambiguous terms, allowed [BP Amoco] to terminate the contract" in two situations: "if [BP Amoco] failed to reach any agreements, suitable to [BP Amoco] in its sole discretion, with third parties regarding the develo pment of the property" or "if, for any reason, [BP Amoco] fa iled to obtain [the required] Approvals within six months o f executing the contract." Huang v. BP Amoco Corp., N o. 00- 1290, slip op. at 1, 7 (E.D. Pa. July 13, 2000).

The District Court recognized that despite subsecti on 7(c)'s "clear and unambiguous terms," BP Amoco was- -like any party to a contract--"bound by an implied coven ant of good faith and fair dealing." Id. at 8. But reasoni ng that "common sense dictates that [BP Amoco] would not ha ve been required to apply for zoning permits, variance s, or other Approvals until [it] had determined with spec ificity how it would develop and operate the property," the District Court found that "any obligation on [BP Amoco] to p ursue Approvals was contingent upon [its] success on proc uring satisfactory agreements [with] third-party co-devel opers." Id. at 12 (emphasis added).

In other words, the District Court found, based on its "common sense" assumption, that BP Amoco's duty to act in good faith did not include a responsibility to s eek and obtain the Approvals until it first reached accepta ble agreements with third-party co-developers. Because BP Amoco "made earnest [though unsuccessful] efforts t o negotiate and reach suitable agreements with third parties," it satisfied its covenant to act in good faith. Id. at 9. Therefore, the District Court concluded, BP Amoco could--as its April 19, 1999, letter did--terminate the Lease without ever trying to obtain the Approvals. Id.

5Following the District Court's grant of summary

judgment to BP Amoco, the Huangs filed a motion for
reconsideration. The District Court denied the Huan gs' motion, again insisting that BP Amoco could not see k Approvals without first reaching agreements with th irdparty co-developers, Huang v. BP Amoco Corp., No. 0 0- 1290, slip op. at 1, 4 (E.D. Pa. October 12, 2000), and this appeal followed. We have jurisdiction under 28 U.S. C.
S 1291.

II. Legal Analysis

We review the District Court's grant of summary judgment de novo. Armbruster v. Unisys Corp., 32 F. 3d 768, 777 (3d Cir. 1994). Rule 56 of the Federal Rules of Civil Procedure provides that a moving party is entitled to summary judgment "if the pleadings, depositions, an swers to interrogatories, and admissions on file, togethe r with the affidavits, if any, show that there is no genuine i ssue as to any material fact and that the moving party is enti tled to a judgment as a matter of law." Fed. R. Civ. P. 56(c) . The moving party bears the initial burden of demonstrat ing the absence of any genuine issue of material fact, thou gh the non-moving party must make a showing sufficient to
establish the existence of each element of his case on which he will bear the burden of proof at trial. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). The standard for granting summary judgment under Rule 56 "mirrors th e standard for a directed verdict under Federal Rule of Civil Procedure 50(a), which is that the trial judge must direct a verdict if, under the governing law, there can be b ut one
reasonable conclusion as to the verdict." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250 (1986).

Pennsylvania contract law informs our analysis of t he District Court's entry of summary judgment. In Pennsylvania, a lease is a contract and "is to be i nterpreted according to contract principles." Hutchinson v. Su nbeam Coal Corp., 519 A.2d 385, 389 (Pa. 1986). One of th e most important principles of contract law is the implied covenant of good faith. "[S]uch a promise is fairly to be im plied. The law has outgrown its primitive stage of formalism w hen the precise word was the sovereign talisman, and every slip was

6fatal." Jamison v. Concepts Plus, Inc., 552 A.2d 26 5, 269

(Pa. Super. Ct. 1988) (quoting Wood v. Lucy, Lady D uffGordon, 118 N.E. 214, 214 (N.Y. 1917) (Cardozo, J.) ). Hence "where it is clear that an obligation is within the contemplation of the parties at the time of contrac ting or is necessary to carry out their intentions, the court will imply
it . . . even where the contract itself is not ambi guous." Slater v. Pearle Vision Center, Inc., 546 A.2d 676, 679 (Pa. Super. Ct. 1988).

Because of the implied covenant of good faith, an approvals contingency clause does not give a lessee an absolute right to terminate the lease without penal ty. Rather, the lessee must make a diligent and good-fa ith effort to obtain the required approvals. Jamison , 552 A.2d at 269.2 Under Pennsylvania law, whether a party ha s made a good-faith effort is a question of fact. Id. at 270 (citing Burke v. Gen. Outdoor Adver. Co., 168 A. 334, 336 ( Pa. Super. Ct. 1933)); Pressey v. McCornack, 84 A. 427, 428 (Pa. 1912); In re J.B. Van Sciver Co., 73 B.R. 838, 845 (Bankr. E.D. Pa. 1987) (applying Pennsylvania law).

In light of these principles, the District Court ma de an unsupported factual assumption that colored its ana lysis. It assumed that BP Amoco could not seek the Approvals untilit reached suitable agreements with third-party codevelopers. Without this factual assumption BP Amoc o would not have carried its initial burden of "show[ ing] that there is no genuine issue as to any material fact." Fed. R. Civ. P. 56(c). The Huangs alleged in their complain t that BP Amoco "made no effort whatsoever to obtain the Appr ovals, in violation of its obligations under Section 7(b) of the Lease." The pleadings and documents in the record o ffer some support for the Huangs' allegation: BP Amoco f ailed to make any effort to seek the Approvals, and failed t o state--on March 19, 1999, April 19, 1999, or at any other time preceding the current litigation--that it fail ed to do so because it could not reach suitable agreements with thirdparty co-developers. Only when faced with legal act ion did

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2. Indeed, "if no duty is implied or imposed upon t he [lessee] in this situation, there is no contract" because the absenc e of an implied obligation would render the lessee's promise illuso ry. Id.

7BP Amoco insist that its bad luck with co-developer s was

responsible for its purported inability to seek the Approvals.

The District Court cited nothing in the record that even tended to disprove the Huangs' allegation, let alon e anything so persuasive that no rational juror could find that BP Amoco's failure to seek the Approvals viola ted its implicit covenant to act in good faith. While BP Am oco presented the statement of its employee that BP Amo co made earnest efforts to find suitable third-party c odevelopers, that statement sheds little if any ligh t on whether BP Amoco acted in good faith with respect t o seeking the Approvals.

Rather than acknowledging the Huangs' allegation on the factual question of BP Amoco's good faith with resp ect to the Approvals, the District Court ignored this issu e by making an assumption on another, underlying questio n of fact: it assumed that getting a suitable co-develop er was the horse before the cart of taking even the first step in obtaining the Approvals. The District Court made th is assumption of fact based only on its own notion of "common sense" rather than anything in the record.

Relying on this assumption enabled the District Cou rt to avoid the factual question that lies at the heart o f this case: whether BP Amoco's failure to seek the Approvals vi olated its covenant of good faith and fair dealing. By ass uming that co-developer agreements must precede any effor t to obtain the Approvals, the District Court effectivel y rewrote the Lease to contain a condition precedent to BP Am oco's obligation regarding those Approvals. In so doing, the Court gutted BP Amoco's good-faith obligation to seek App rovals and, by entering summary judgment in its favor, ran afoul of Rule 56(c).

* * * * *

Because the District Court substituted its version of "common sense" for that of a jury and thereby decid ed a disputed issue of material fact (from which followe d its conclusion of law), we reverse its entry of summary

8judgment and remand for further proceedings consist ent

with this opinion.

A True Copy:

Teste:

Clerk of the United States Court of Appeals
for the Third Circuit

9