Court Opinion

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Opinions of the United
2001 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit

11-8-2001

Huang v. BP Amoco Corp
Precedential or Non-Precedential:

Docket 00-3607

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Recommended Citation
"Huang v. BP Amoco Corp" (2001). 2001 Decisions. Paper 261.
http://digitalcommons.law.villanova.edu/thirdcircuit_2001/261

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Filed 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 Appellants
       William 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 commercial
property lease under Pennsylvania law, appellants Joseph
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 Court")
granting summary judgment in favor of appellee BP Amoco
Corporation ("BP Amoco"), the successor in interest of
Amoco Oil Company ("Amoco" or "Lessee"). We conclude
that by making the unsupported factual assumption that
Amoco could not apply for contractually required
Government approvals until it procured satisfactory
agreements with third-party co-developers, the District
Court unjustifiably allowed BP Amoco to flout its implied
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 Philadelphia
from the Huangs for fifteen years. The Lease allowed Amoco
to make improvements to the property for the purpose 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 "approvals"

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from various government authorities for any improvements
to the property, subject to thirty-day extensions at the
Huangs' option:

       Lessee shall apply for appropriate zoning and for
       issuance from the proper municipal, county, state and
       other duly constituted authorities such unconditional
       Approvals and permits . . . (collectively "the Approvals")
       satisfactory to Lessee, in its sole discretion, for the
       razing of improvements, construction of improvements
       and installation of equipment for a retail gasoline
       facility and for the operation and maintenance of such
       facility. . . . Lessee shall not be deemed to be in default
       of any provision relating to the Approvals as long as the
       pursuit of the administrative, legal or equitable
       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 Approvals, or
       denial, are not received by Lessee within the 180 days,
       Lessor shall have the option, at his sole discretion, of
       extending the period for an additional thirty (30) days,
       and granting additional thirty (30) day periods
       thereafter until the Approvals or denial are received, or
       canceling this Lease.

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

Subsection 7(c)1 listed situations in which Amoco could
_________________________________________________________________

1. Subsection 7(c) reads in full:

       In the event Lessee shall be unable to obtain the Approvals, or any
       thereof; or in the event the Approvals, or any thereof, if
obtained,
       shall be afterward revoked without fault of Lessee, or its assignee
or
       sublessee; or in the event Lessee shall be unable to enter into an
       agreement satisfactory to Lessee, in its sole discretion, for the
co-
       development with a third party quick-service restaurant and
       satisfying all conditions and contingencies in that agreement; or
in

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terminate the Lease without incurring liability. Three of
these situations are relevant here. First, it could terminate
the Lease if one of the required Approvals were denied.
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 party quick-
service restaurant. . . ." Third, "[i]f for any reason [Amoco]
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, terminate
this Lease as though the Approvals, of any thereof, had
been denied."

Six months after signing the Lease, BP Amoco had made
no efforts to obtain the required Approvals. On March 19,
1999, BP Amoco and the Huangs agreed to extend the 180-
day period for obtaining Approvals to April 20, 1999. On
April 19, 1999, still having made no effort to obtain any
Approvals, BP Amoco sent a letter to the Huangs stating
that it "has not obtained the Approvals required by Section
7 . . . within the prescribed 180-day period as extended to
April 20, 1999," and "[a]ccordingly, pursuant to Section 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 upon its
procuring satisfactory third-party co-developer agreements.
_________________________________________________________________

       the event necessary utility connections (including but not limited
to
       electricity, natural gas, sanitary and storm sewer, telephone and
       water hookups) adequate in Lessee's sole judgment are unavailable
       at the property line or in the adjoining right-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 terminating this Lease by giving
       Lessor ten (10) days' notice of its intention so to do, and shall
       thereupon be relieved of all liability hereunder. 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, terminate this Lease as though
       the Approvals, or any thereof, had been denied.

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Indeed, on neither occasion did BP Amoco even mention its
inability to reach such agreements.

After BP Amoco announced that it was terminating the
Lease despite occupying the property rent-free for seven
months, the Huangs brought suit in the District Court and
filed a motion for summary judgment. BP Amoco responded
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 clear 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 development of
the property" or "if, for any reason, [BP Amoco] failed to
obtain [the required] Approvals within six months of
executing the contract." Huang v. BP Amoco Corp., No. 00-
1290, slip op. at 1, 7 (E.D. Pa. July 13, 2000).

The District Court recognized that despite subsection
7(c)'s "clear and unambiguous terms," BP Amoco was--like
any party to a contract--"bound by an implied covenant of
good faith and fair dealing." Id. at 8. But reasoning that
"common sense dictates that [BP Amoco] would not have
been required to apply for zoning permits, variances, or
other Approvals until [it] had determined with specificity
how it would develop and operate the property," the District
Court found that "any obligation on [BP Amoco] to pursue
Approvals was contingent upon [its] success on procuring
satisfactory agreements [with] third-party co-developers."
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 seek and
obtain the Approvals until it first reached acceptable
agreements with third-party co-developers. Because BP
Amoco "made earnest [though unsuccessful] efforts to
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.

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Following the District Court's grant of summary
judgment to BP Amoco, the Huangs filed a motion for
reconsideration. The District Court denied the Huangs'
motion, again insisting that BP Amoco could not seek
Approvals without first reaching agreements with third-
party co-developers, Huang v. BP Amoco Corp., No. 00-
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, answers
to interrogatories, and admissions on file, together with the
affidavits, if any, show that there is no genuine issue as to
any material fact and that the moving party is entitled to a
judgment as a matter of law." Fed. R. Civ. P. 56(c). The
moving party bears the initial burden of demonstrating the
absence of any genuine issue of material fact, though 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 the
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 but 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 the
District Court's entry of summary judgment. In
Pennsylvania, a lease is a contract and "is to be interpreted
according to contract principles." Hutchinson v. Sunbeam
Coal Corp., 519 A.2d 385, 389 (Pa. 1986). One of the most
important principles of contract law is the implied covenant
of good faith. "[S]uch a promise is fairly to be implied. The
law has outgrown its primitive stage of formalism when the
precise word was the sovereign talisman, and every slip was

                               6
fatal." Jamison v. Concepts Plus, Inc., 552 A.2d 265, 269
(Pa. Super. Ct. 1988) (quoting Wood v. Lucy, Lady Duff-
Gordon, 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 contracting or is
necessary to carry out their intentions, the court will imply
it . . . even where the contract itself is not ambiguous."
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 penalty.
Rather, the lessee must make a diligent and good-faith
effort to obtain the required approvals. Jamison , 552 A.2d
at 269.2 Under Pennsylvania law, whether a party has 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 made an
unsupported factual assumption that colored its analysis. It
assumed that BP Amoco could not seek the Approvals until
it reached suitable agreements with third-party co-
developers. Without this factual assumption BP Amoco
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 complaint that BP
Amoco "made no effort whatsoever to obtain the Approvals,
in violation of its obligations under Section 7(b) of the
Lease." The pleadings and documents in the record offer
some support for the Huangs' allegation: BP Amoco failed to
make any effort to seek the Approvals, and failed to
state--on March 19, 1999, April 19, 1999, or at any other
time preceding the current litigation--that it failed to do so
because it could not reach suitable agreements with third-
party co-developers. Only when faced with legal action did
_________________________________________________________________

2. Indeed, "if no duty is implied or imposed upon the [lessee] in this
situation, there is no contract" because the absence of an implied
obligation would render the lessee's promise illusory. Id.

                               7
BP Amoco insist that its bad luck with co-developers 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 alone
anything so persuasive that no rational juror could find
that BP Amoco's failure to seek the Approvals violated its
implicit covenant to act in good faith. While BP Amoco
presented the statement of its employee that BP Amoco
made earnest efforts to find suitable third-party co-
developers, that statement sheds little if any light on
whether BP Amoco acted in good faith with respect to
seeking the Approvals.

Rather than acknowledging the Huangs' allegation on the
factual question of BP Amoco's good faith with respect to
the Approvals, the District Court ignored this issue by
making an assumption on another, underlying question of
fact: it assumed that getting a suitable co-developer was
the horse before the cart of taking even the first step in
obtaining the Approvals. The District Court made this
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 Court to
avoid the factual question that lies at the heart of this case:
whether BP Amoco's failure to seek the Approvals violated
its covenant of good faith and fair dealing. By assuming
that co-developer agreements must precede any effort to
obtain the Approvals, the District Court effectively rewrote
the Lease to contain a condition precedent to BP Amoco's
obligation regarding those Approvals. In so doing, the Court
gutted BP Amoco's good-faith obligation to seek Approvals
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 decided a
disputed issue of material fact (from which followed its
conclusion of law), we reverse its entry of summary

                                8
judgment and remand for further proceedings consistent
with this opinion.

A True Copy:
Teste:

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

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