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Guided by a leading federal court case addressing the “good faith” requirement of the Uniform Commercial Code, the Pennsylvania Superior Court earlier this month analyzed the “good faith” standard of the Pennsylvania Commercial Code. In Eighth North-Val Inc. v. William L. Parkinson, PICS Case No. 01-0652 (Pa. Super. April 3, 2001) Del Sole, J.; Beck, J. concurring in result (14 pages), the Superior Court concluded that there is no bad faith where a party obtains a modification in a contract by merely exercising a contractual right. Writing for the court, Judge Joseph A. Del Sole said a party’s declining to purchase stock was merely an option and not a threat of breach. In so doing, the court affirmed a trial court’s judgment on behalf of Eighth North-Val Inc., a subsidiary of Summit Bank, rejecting both the procedural and substantive arguments asserted by the defendants in the collection action. The court concluded the trial court did not err when it denied the defendants’ motions for post-trial relief. In the spring of 1986, William L. Parkinson, E. Wayne Pocius and Russell Dimmick formed a tax-sheltered entity called Evergreen Valley Nursery Limited Partnership. Weatherly Private Capital was hired to create and market Evergreen. After that, the parties entered into a series of complex agreements. Parkinson, Pocius and Weatherly agreed the William L. Parkinson, D.D.S, P.C. pension trust would buy nursery stock from a general partnership known as Van Pines and then immediately sell the stock to Evergreen. On July 28, 1986, the Parkinson pension trust agreed to purchase its nursery stock with Van Pines. Under this agreement, the Pension Trust was required to buy 44 percent of the nursery stock, with an option to buy up to 100 percent. The pension trust would pay for the stock with both cash and promissory notes, to be personally guaranteed by Parkinson. This agreement called for two closings: the first to take place in October 1986 for the required 44 percent, and the second — for the remaining stock — to take place in December 1986. In September 1986, the pension trust and Evergreen entered into an agreement for the immediate resale of the Van Pines stock. Evergreen was to buy the minimum 44 percent, with an option to buy the remainder by Dec. 31, 1986. This agreement also called for two closings. The first closing actually took place on Nov. 3, 1986, and the Pension Trust purchased the 44 percent of Van Pines stock for cash and a promissory note the same day. However, contrary to the agreement, the note was not personally guaranteed by Parkinson. The pension trust then immediately sold the stock to Evergreen. Shortly before the second closing was to occur, Pocius advised Parkinson that he would have to sign notes with terms different from those in the Nov. 3 note. The modifications included, among other things, a requirement that Parkinson personally guarantee promissory notes issued by the Pension Trust. These modifications would change the Nov. 3 note as well as the note to be executed at the second closing. In addition, the July 1986 agreement was also modified at the insistence of Weatherly’s tax attorneys. Parkinson agreed to the changes and executed the notes both individually and as trustee of the pension trust. Due to changes in the tax law, some anticipated tax advantages were lost; all parties ultimately suffered financial problems. Promissory notes from the pension trust were assigned to Eight North-Val, which sued the Parkinson pension trust and Parkinson, both as an individual and as trustee of the Pension Trust. After a bench trial, the court found for Eight North-Val and denied Parkinson’s post-trial motions for relief. Parkinson appealed. APPEAL On appeal, Parkinson argued the trial court erred in finding that modifications to the parties’ original agreement complied with the “good faith” standard set forth in the Pennsylvania Commercial Code. Del Sole noted that both parties relied upon the 6th U.S. Circuit Court of Appeals’ holding in Roth Steel Products v. Sharon Steel Corp., 705 F.2d 134 (6th Circ. 1983), described by the court as “one of the leading federal court cases,” since no Pennsylvania cases interpret the good faith requirement of the UCC. The court described the two-part inquiry established in Roth, which determines whether a party seeking modification acted in good faith. The test requires a court to consider 1) whether the party’s conduct is consistent with reasonable commercial standards of fair dealing in the trade and 2) whether the parties were, in fact, motivated to seek modification by an honest desire to compensate for commercial exigencies. “In analyzing this second, ‘honesty in fact’ requirement, the trier of fact must determine whether the means used to obtain the modification constitute extortion or overreaching,” the court said. The defendants argued that the case at bar was identical to Roth, where the court found defendant Sharon Steel did not act in good faith. Sharon Steel obtained contract modifications by threatening to breach the contract by raising prices. The defendants asserted that, like Sharon Steel, Evergreen threatened not to go through with the second closing unless modifications were made. But the court rejected this argument. The court said the disputed agreement required Evergreen to purchase of the first 44 percent of the nursery stock; however, the purchase of any of the remaining stock was optional. Therefore, Evergreen was not threatening to breach the contract, since it had the right not to purchase anything over the first 44 percent. “Where a party is merely exercising a contractual right, rather than threatening to breach the contract, there is no bad faith,” Del Sole reasoned. Parkinson also claimed the trial judge incorrectly followed the appellate court standard of review when it decided its motion for post-trial relief, but the court said even if the defendant was correct, any error was harmless. Del Sole said the trial court “extensively reviewed the record, reconsidered its credibility determinations, and explained its conclusions of law.” There was no indication that the trial court was bound by a “too-restrictive standard such that it would not have granted a new trial had it found reason to do so.” Paul G. Nofer and Ira Rosenau of Klehr Harrison Harvey Branzburg & Ellers represented North-Val. Parkinson was represented by Obermayer Rebmann Maxwell & Hippel’s E. Parry Warner.

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