Opinion ID: 2190354
Heading Depth: 1
Heading Rank: 2

Heading: the management fees and maintenance costs

Text: Mr. Lipsitz testified at trial that Charles Hall, as agent for the two corporate general partners, orally agreed that there would be no management or maintenance fees charged to the partnership. The assertion is at least not inconsistent with the pro formas prepared by Mr. Hall for both projects prior to the signing of the limited partnership agreements. Hence, it was contended that Barry Hall's later hiring of McQuarters Management Corporation (solely owned by him) to manage the two properties after construction was complete, and the assessment of fees of 5% (and later 6%) of gross rentals to pay the Management Corporation (later succeeded by McQuarters Realty Co., Inc.) constituted improper deductions from gross partnership earnings. No claims were made, incidentally, that actual out-of-pocket maintenance expenses were improperly charged. The trial court determined that since management and maintenance fees were not expressly dealt with in the written partnership agreements themselves, that extrinsic or parole evidence was admissible to show the true intentions of the parties on the matter. In response to the contention that admission of evidence of the alleged prior oral understanding violated the parole evidence rule, [5] which generally prohibits the introduction of oral testimony to vary the terms of a written agreement, the trial court held that if the parties intended the written agreement as their final expression of assent, but that it was ambiguous or silent as to a matter, that parole evidence could be admitted to interpret the instrument and explain the ambiguity or the omitted matter. Parker v. Hough, 420 Pa. 7, 215 A.2d 667 (1966). Having thus disposed of the parole evidence problem, the trial court accepted the oral testimony and concluded that the management fees (but not maintenance fees) were improperly charged, thus allowing the claims against the corporate general partners which claims exceeded $330,000.00 as of 1980. The Superior Court affirmed holding that when the terms of a written agreement are at issue, the parole evidence rule bars the admission of oral representations made before or contemporaneously with the subject contract, only if those representations concern a matter specifically dealt with in the contract itself. The integrity of written agreements would thereby be preserved. Rose v. Food Fair Stores, 437 Pa. 117, 262 A.2d 851 (1970). However, when the written contract is ambiguous on any point or does not accurately reflect the intent of the parties, parole evidence is admissible to shed light on these short-comings. Noting that each limited partnership agreement provided that the corporate general partner would conduct partnership affairs, the agreements also recognized that no salary would be collected for so doing. However, there was no explicit mention of fees and costs related to daily operations. Accordingly, the Superior Court thought that extrinsic evidence could be properly admitted to clarify the matter. Happily, neither court chose to discuss the distinction between patent and latent ambiguities! We think that the failure to apply the parole evidence rule here was clear error, and hence, that the allowance of the claims against the corporate general partners for the management fees charged must be reversed. Article V, § 1 of the Green Hill-Lytle limited partnership agreement and Article IV, § 1, of the Essex Square agreement provide as follows: 1. The General Partner shall operate and maintain and conduct the partnership business including the erection and construction of the aforementioned apartment building complex. (R. 610a, 684a). Article V, § 6 of the Green Hill-Lytle agreement and Article IV, § 6 of the Essex Square agreement provide: 6. The Limited Partners shall not take part in the management of the business nor transact any business for the partners. No salary shall be paid to any partner. (R. 611a-612a, 685a). The language of these clauses is perfectly plain and straightforward. In this context, these clauses are not ambiguous and they are not incomplete. Power to operate, maintain and conduct all aspects of the two partnership businesses is vested wholly and completely in each corporate general partner. This, indeed, is an essential requirement in light of our Limited Partnership Act. Section 521 of that Act now provides: A limited partner shall not become liable as a general partner unless, in addition to the exercise of his rights and powers as a limited partner, he takes part in the control of the business. [6] Claimants cannot have it both ways. In exchange for exposure to only limited liability, and the tax advantages available because of the use of the limited partnership entity (discussed above), the limited partners must abstain from participation in the conduct of the business. Discretion to conduct the business and to make routine and normal business judgments must, therefore, rest with the general partner, and that is precisely what these agreements provided. The decision by Barry Hall to employ his solely owned management company (while he operated the two corporate general partners on account of his position as executor) may or may not have constituted sharp dealing. Nonetheless, it was well within the sound discretion of each of the corporate general partners to make such a decision in the course of their control and conduct of the partnership business. There is absolutely no showing in this record that the 5% or 6% management fees were excessive or that they exceeded fees normally charged at the time for this kind of service. There is no evidence that there was a breach of fiduciary duty by either corporate general partner. Consequently, we hold that the Claimants are bound by the sophisticated written agreements they entered into which clearly delegated the power to make all management decisions to the corporate general partners, including, by necessary deduction, the decisions to hire a management service. They should not have been allowed to introduce parole evidence to claim otherwise. The decision to allow Appellees' claim for the management fees is, therefore, reversed. [7]