Schulman v. J.P. Morgan Inv. Mgmt. Inc.

Opinions of the United
1994 Decisions States Court of Appeals
for the Third Circuit

9-13-1994

Schulman v. J.P. Morgan Inv. Mgmt. Inc.
Precedential or Non-Precedential:

Docket 93-1888

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 UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

___________

No. 93-1888
___________

ROBERT D. SCHULMAN, t/a MAXI'S EXPRESS,
Appellant

v.

J.P. MORGAN INVESTMENT MANAGEMENT, INC.;
WIDENER FUNDING CORP., INC.,
Appellees

___________

Appeal from the United States District Court
for the Eastern District of Pennsylvania
(D.C. Civil Action No. 92-cv-02853)
___________

Argued: March 25, 1994

PRESENT: HUTCHINSON, ROTH and ROSENN, Circuit Judges

(Filed September 13, l994

____________

Daniel J. Dugan, Esquire (Argued)
Paul R. Rosen, Esquire
Spector, Gadon & Rosen, P.C.
29th Floor
1700 Market Street
Philadelphia, PA 19103
Attorneys for Appellant

M. Melvin Shralow, Esquire
Frumkin, Shralow & Cerullo, P.C.
33rd Floor
1601 Market Street
Philadelphia, PA 19103
and
Leonard S. Baum, Esquire
Dean T. Cho, Esquire (Argued)
Haythe & Curley
237 Park Avenue
New York, NY 10017
Attorneys for Appellees

____________

OPINION OF THE COURT
____________

HUTCHINSON, Circuit Judge.

Appellant, Robert D. Schulman ("Schulman"), t/a Maxi's

Express ("Maxi's"), appeals an order of the United States

District Court for the Eastern District of Pennsylvania granting

summary judgment in favor of appellees, J.P. Morgan Investment

Management, Inc. ("J.P. Morgan") and Widener Funding Corporation,

Inc. ("Widener") (collectively "mortgagee"), on Schulman's claim

that the mortgagee intentionally interfered with contractual

relations between him, as tenant of a commercial building, and

Widener Associates Limited Partnership ("WALP"), the landlord.1

The order also granted summary judgment to the mortgagee on its

counterclaim for a declaratory judgment that no valid,

enforceable lease existed.

For the reasons that follow, we hold the district court

had subject matter jurisdiction over the question raised in

Count I of Schulman's complaint and the portion of J.P. Morgan's

amended pleading styled as a counterclaim despite WALP's absence

1
. WALP is not a party to this action.
as a party. On the merits of that issue, we conclude that the

district court correctly determined there was no existing lease

with which the mortgagee could have tortiously interfered. No

lease existed between WALP and Schulman because the draft leases

on which all of the negotiations between Schulman and WALP were

based explicitly required execution by the landlord, an event

that never happened. In addition, even if we assume Schulman had

a reasonable probability of obtaining a lease absent J.P.

Morgan's and Widener's interference, Schulman's alternate claim

for interference with a prospective contractual relation between

himself and WALP fails as a matter of law because Morgan and

Widener were acting in good faith to protect their legal and

financial interests as mortgagee of the premises Schulman sought

to lease from WALP. Accordingly, we will affirm the district

court's order in all respects.

I.

In 1990 WALP, the owner of the Widener Building in

Philadelphia, began a major renovation of the building to attract

upscale tenants. Jeffrey Kelter ("Kelter") was the principal

acting on WALP's behalf regarding the renovation.2 Equitable

Life Assurance Society of the United States ("Equitable Life")

2
. WALP's general partners include Kelter, Peter Faherty
("Faherty") and 1339 Chestnut Street Associates. Kelter and
Faherty, along with Anthony Brady, are also the principal
stockholders in FKB Management, Inc. ("FKB"). FKB manages the
Widener Building under a management agreement with WALP dated
July 18, 1991. 1339 Chestnut Street Associates has no
affiliation with FKB.
began funding the building's renovation under a construction loan

agreement with WALP dated June 8, 1990. The agreement included

among other documents a Mortgage and Assignment of Leases and

Rents, both of which were publicly recorded on June 15, 1990

under Pennsylvania's recording laws, 21 Pa. Cons. Stat. Ann.

§§ 321-471 (deeds), 621-28 (mortgages) (1955 & Supp. 1994).

Equitable Life assigned these documents to Widener under an

"Assignment of Loan Documents" which was also publicly recorded

on July 24, 1990. As recited in the Mortgage, WALP and Widener

also executed a Permanent Loan Agreement dated June 8, 1990 in

which Widener agreed to loan WALP up to $72 million for

renovations, including a take-out of Equitable Life's

construction financing. Both the Assignment of Leases and the

Permanent Loan Agreement provided WALP would not lease any part

of the building without the prior written consent of Widener, the

assignee.

As of April 1, 1992, Widener had loaned WALP

approximately $63 million to finance the renovations. Anne

Pfeiffer, Vice President of both Widener and J.P. Morgan,3

supervised the loan and was responsible for approving new leases

on Widener's behalf.4
3
. J.P. Morgan acts as a trustee for a commingled pension trust
fund and invests monies which come from over 157 domestic pension
and employee benefit funds. J.P. Morgan, as trustee, wholly owns
Widener which it formed for the sole purpose of providing
financing to WALP.
4
. Pfeiffer stated in her affidavit that typically her approval
of a lease was not sought until the lease was signed by the
prospective tenant. Once she approved the lease on behalf of
Widener, the lease was executed by WALP as landlord.
 In the summer of 1990 Kelter and Schulman began

discussing plans for Schulman to operate Maxi's, a food

establishment in the lobby of the Widener Building.5 It is

undisputed that both Kelter and Schulman anticipated that a lease

would be executed for Schulman's establishment at some later

date. Under the construction arrangement, the tenants received

the first year's rent free of charge, which in Schulman's case

amounted to $56,280. Schulman agreed to "contribute" this amount

personally to Kelter for construction and obtained an offsetting

construction allowance from Kelter. Schulman invested an

additional $35,000 towards construction costs.

Kelter participated in and approved the design plans

for Maxi's before construction began and forwarded them to

Pfeiffer. According to Schulman, Kelter told him that he alone

made decisions concerning the premises to be leased and that he

never told Schulman that Widener and J.P. Morgan had to approve

the lease. Schulman admits, however, that he knew Pfeiffer was

connected with the lender and that she wanted to review the draft

leases prior to execution. Construction began in September of

1991 despite the fact no lease had yet been signed.

Kelter sent Schulman three draft leases dated June 4,

1990, March 19, 1991 and August 6, 1991 respectively prior to

commencing construction. Schulman reviewed these drafts himself

and his counsel, Martin Herring & Associates and later Drinker,

5
. Kelter allegedly advised Schulman that Maxi's had to be
"absolutely first-class" because the renovations were aimed at
obtaining first class tenants, but Schulman disputes this fact.
Biddle & Reath, also reviewed at least two of the drafts.

Schulman noted several objections on the drafts, some of which

were incorporated into subsequent drafts. According to Schulman,

the third draft lease dated August 6, 1991, set forth all of the

material agreed-upon terms. Schulman never objected to a

provision appearing in all of the draft leases that expressly

required WALP's approval and signature, as well as delivery of a

fully executed lease, before any binding lease agreement would

arise.

As construction continued, Schulman repeatedly tried to

obtain an executed lease. Kelter reassured him each time that

Schulman had a lease and had nothing to worry about. Though

neither WALP nor Widener executed any of the draft leases,

Schulman contends that a ten-year lease for the premises

commenced in October or November 1991 when Schulman began

construction of his establishment and the terms of this lease,

agreed upon by August 6, 1991, are embodied in a fourth draft

dated January 31, 1992 which FKB sent to Schulman on February 4,

1992.

Maxi's opened for business on December 2, 1991 despite

the absence of an executed lease. After the renovated Widener

Building's official grand opening celebration on December 12,

1991, Pfeiffer told Kelter she did not like Maxi's appearance and

called it her "worst nightmare." Appendix to Brief of Robert D.

Schulman ("App.") at A-91. Shortly thereafter, according to

Schulman, Kelter began, for the first time, to express

displeasure about Maxi's aesthetics and appearance and suggested
physical and operational improvements.6 Schulman agreed to the

suggestions but could not implement them because of a lack of

sufficient funds. Kelter agreed to provide funding for the

improvements but never did so.

On February 3, 1992, FKB employee Stephen Butte sent

Schulman a letter confirming the amount of rent he now owed

"pursuant to the terms of your lease." App. at A-200. On

February 4, 1992, another FKB employee, Jennifer Pancoast, sent

Schulman a second letter enclosing three "approved execution

copies of the Lease Agreement for your space at The Widener

Building." App. at A-97.

In March of 1992 Kelter told Schulman he had no lease

and ordered him to vacate the premises. Kelter offered to

compensate Schulman for his out-of-pocket expenses and prior rent

checks. Schulman refused the offer. WALP filed suit for

ejectment in the Philadelphia Court of Common Pleas on May 18,

1992.7 Kelter also moved for a preliminary injunction. After

four days of hearings, Kelter abandoned that motion.

6
. According to Schulman, he learned the reason for Kelter's
change of heart and growing displeasure with Maxi's only after
Pfeiffer testified in state court on April 29, 1992 in support of
WALP's motion for a preliminary injunction against Schulman.
Schulman complains Pfeiffer was well aware of the construction
and design plans for Maxi's long before its opening because she
had received at least one draft of the lease in June 1991 as well
as the architect's final design plans. She also visited the
construction site on several occasions, one as late as November
of 1991. At no time did she question Schulman's design for
Maxi's. She states she never really examined the establishment
until December 12, 1991.
7
. The ejectment action remains pending in state court.
 In May of 1992 Schulman filed a complaint in the

district court against J.P. Morgan and Widener alleging

intentional interference with existing or prospective contractual

relations. On January 19, 1993, J.P. Morgan and Widener moved to

amend their answer to include what they called a counterclaim for

a declaratory judgment that Schulman did not have a valid,

enforceable lease. Ten days later they moved for summary

judgment and sanctions.

On April 22, 1993, the district court granted J.P.

Morgan's and Widener's motions to amend their answer and also

concluded WALP was not an indispensable party on the counterclaim

under Federal Rule of Civil Procedure 19. On August 19, 1993,

the court granted the mortgagee's motion for summary judgment

against Schulman on all claims, including the so-called

counterclaim for a declaratory judgment, but declined to impose

sanctions. In its opinion the district court held Schulman could

not prevail on his Count I claim for intentional interference

with an existing contract because both WALP and Widener were

required to consent to any lease and therefore Schulman had no

existing lease with WALP. It also held Schulman had no

reasonable prospect of obtaining a lease. Alternately, the

district court held any interference was privileged because J.P.

Morgan and Widener, as mortgagee and assignee of the leases, had

both a legal and financial interest in the transaction. Finally,

the district court declared Schulman had no valid, enforceable

lease for the premises. Schulman filed a timely notice of

appeal.
 II.

Because Schulman is a Pennsylvania citizen while J.P.

Morgan and Widener are New York corporations with their principal

places of business in New York and the claimed damages exceed

$50,000, the district court had subject matter jurisdiction under

28 U.S.C.A. § 1332(a) (West 1993) when Schulman filed this case.

We have appellate jurisdiction over the district court's final

order granting summary judgment under 28 U.S.C.A. § 1291 (West

1993). Accordingly, all facts in the record, and all reasonable

inferences deduced therefrom, will be construed in the light most

favorable to Schulman, the non-moving party. Mellon Bank Corp.

v. First Union Real Estate Equity and Mortgage Invs., 951 F.2d

1399, 1404 (3d Cir. 1991).

The district court's conclusion that WALP is not an

indispensable party under Federal Rule of Civil Procedure 19(b)

is reviewed for abuse of discretion. Janney Montgomery Scott,

Inc. v. Shepard Niles, Inc., 11 F.3d 399, 403 (3d Cir. 1993).8

We exercise plenary review over the district court's grant of

summary judgment. Mellon, 951 F.2d 1399, 1404 (3d Cir. 1991);
see Fed. R. Civ. P. 56(c). We also review a district court's

decision to review or dismiss an action under the Declaratory

8
. In Janney we held a district court's determination that an
absent party is necessary under Rule 19(a), as opposed to
indispensable under Rule 19(b), is subject to plenary review when
the district court's determination is premised on a conclusion of
law. Janney, 11 F.3d at 404. We will assume WALP is necessary
under Rule 19(a) as discussed infra Part III A.
Judgment Act, 28 U.S.C.A. §§ 2201, 2202 (West 1982 & Supp. 1994),

for abuse of discretion. See United States v. Pennsylvania,

Dep't of Envtl. Resources, 923 F.2d 1071, 1073 (3d Cir. 1991).

III.

In response to the mortgagee's motion to amend its

answer to assert as a counterclaim for a declaratory judgment its

argument that no lease existed, Schulman argued in the district

court that WALP was an indispensable party because its presence

was essential to resolving the mortgagee's counterclaim. He also

argued that a decision on the mortgagee's counterclaim would

expose him to a substantial risk of inconsistent rulings if WALP

were not joined because he would be collaterally estopped in the

pending state court ejectment action by a declaratory judgment

that no lease exists, but WALP would not be collaterally estopped

if the district court decided a lease did exist.

The district court granted the mortgagee's motion to

add the attack on the lease's existence that was called a

counterclaim, expressly rejecting Schulman's contention that WALP

was an indispensable party. The district court first noted

Schulman would not be prejudiced by the proposed counterclaim

because all questions relating to the existence of Schulman's

lease were already at issue in Schulman's own claim of

intentional interference with contractual relations. It also

stated its ruling on the counterclaim would not interfere with or

complicate the pending eviction action against Schulman in state

court:
 Whether Mr. Schulman had an enforceable lease
or not is an entirely separate question from
the one now in state court of whether Mr.
Schulman has any rights against the landlord.
Moreover, my ruling need not prompt those
parties to dispute the ruling's collateral
estoppel effect. If I find, after full and
fair litigation on the merits, that there was
no lease, Mr. Schulman cannot re-litigate
that issue in state court. See Parklane
Hosiery Co., Inc. v. Shore, 439 U.S. 322, 328
(1979). If, on the other hand, Mr. Schulman
is concerned that the landlord will try to
re-litigate the issue should I find there was
a lease, he can accept the landlord's
counsel's proposal that both Mr. Schulman and
the landlord waive their rights to re-
litigate the existence of the lease.

Schulman v. J.P. Morgan Investment Management, Inc., No.

92-cv-02853 (E.D. Pa. April 22, 1993) (footnote omitted) (order

granting motion to amend). Finally, the district court stated

"[w]hile the landlord may be an important witness on the issue of

whether the requirements of a Widener Building lease were

satisfied, he need not be a party to Schulman's suit against the

building's lender for intentional interference." Id. (emphasis
in original).

Schulman did not argue on appeal that the district

court's order granting the mortgagee's motion to amend its answer

to assert a counterclaim for a declaratory judgment was

erroneous. Nevertheless, prior to oral argument we asked the

parties to submit letter memoranda addressing the effect of

WALP's non-joinder under Rule 19(b). See Finberg v. Sullivan,

634 F.2d 50, 55 (3d Cir. 1980) (in banc) (this Court on appeal

can raise sua sponte problem of joinder without motion of
parties) (citing Provident Tradesmens Bank & Trust Co. v.

Patterson, 390 U.S. 102, 111 (1968)).

The parties assumed that the only basis for

jurisdiction was diversity. Therefore, in both the district

court and here they briefed the jurisdictional issue in terms of

the Rule 19 distinction between necessary and indispensable

parties. In doing so, they overlooked the possibility of

supplemental jurisdiction under 28 U.S.C.A. § 1367 (West 1993)

that would be present if J.P. Morgan's amended pleading claiming

that no lease exists is truly a counterclaim. See 6 Charles A.

Wright & Arthur R. Miller, Federal Practice and Procedure §§ 1414

at 99, 1422 at 170, 1436 at 274-76 (1990). J.P. Morgan's claim

that no lease exists may, however, be no more than a defense to

Count I of Schulman's complaint, not a counterclaim. See Fed. R.

Civ. P. 8(c) (permitting court to relabel improperly labeled

counterclaims and defenses). If this claim is mislabeled,

consideration of WALP's status as a necessary or indispensable

party under Rule 19 would be required.

Accordingly, whether the amended complaint's claim that

the lease does not exist is treated as a counterclaim or a

redundant defense is immaterial to the district court's

jurisdiction over J.P. Morgan's contention that no lease ever

existed. Moreover, if it is not a redundant defense, we disagree

with the dissent's conclusion that the district court abused its

discretion in addressing the merits of that contention and

resolving it in favor of J.P. Morgan and against Schulman.
 A.

Supplemental jurisdiction under section 1367 would not

be available if the mortgagee's attack on the existence of the

lease that is the basis of Count I of Schulman's complaint is not

a true counterclaim, but consideration of the merits would

nevertheless be proper unless WALP is not an indispensable party

under Federal Rule of Civil Procedure 19(b). For the reasons

hereinafter given, we conclude WALP is not indispensable.

Rule 19 sets forth a two step procedure for determining whether a

person is an indispensable party. See Sindia Expedition, Inc. v.

Wrecked and Abandoned Vessel, 895 F.2d 116, 121 (3d Cir. 1990);

Abel v. American Art Analog, Inc., 838 F.2d 691, 694-95 (3d Cir.

1988). Under the rule, a court must consider whether an absent

party is "necessary" and "indispensable." We will first consider

whether WALP is a "necessary" party to this action.

Schulman argues the landlord is necessary under both

Rule 19(a)(2)(i) and Rule 19(a)(2)(ii).9 Under Rule 19(a)(2)(ii)

9
. Federal Rule of Civil Procedure 19(a) provides, in pertinent
part:

Rule 19. Joinder of Persons Needed for Just
Adjudication

(a) Persons to be Joined if Feasible. A
person . . . shall be joined as a party . . .
if (1) in the person's absence complete
relief cannot be accorded among those already
parties, or (2) the person claims an interest
relating to the subject of the action and is
so situated that the disposition of the
action in the person's absence may (i) as a
practical matter impair or impede the
person's ability to protect that interest or
(ii) leave any of the persons already parties
we ask whether nonjoinder would subject Schulman to a substantial

risk of inconsistent obligations if the district court decided

there was a lease and WALP subsequently challenged this finding

in state court.

We recognize that a decision in this action on the

mortgagee's defense to Schulman's claim for tortious interference

denying the existence of any lease between Schulman and WALP

could affect the pending state court action, but whether WALP

would be collaterally estopped is ultimately a matter for the

state court to decide when the issue arises. Cf. Janney, 11 F.3d

at 407 (declining "to hold that any potential effect the doctrine

[of stare decisis] may have on an absent party's rights makes the

absent party's joinder compulsory under Rule 19(a) whenever

'feasible'"). Nevertheless, under general principles of

collateral estoppel or issue preclusion, a strong argument can be

made that WALP would be bound.10 Moreover, during the district

court proceedings WALP agreed to be bound by the district court's

determination on the lease's existence. We will therefore

assume, without deciding, that WALP is a necessary party under

(..continued)
subject to a substantial risk of incurring
double, multiple, or otherwise inconsistent
obligations by reason of the claimed
interest.

Fed. R. Civ. P. 19(a) (in relevant part).
10
. See Restatement (Second) of Judgments §§ 27-29 (1982).
WALP's interests are the same as the mortgagee and the mortgagee
had a full and fair opportunity to litigate the issue as well as
every incentive to press its defense that no lease ever arose.
Rule 19(a) and go on to consider whether it is also indispensable

under Rule 19(b).

B.

The extent to which a judgment rendered in WALP's

absence might be prejudicial to it or to those already parties to

this case must be considered under Rule 19(b) as well as 19(a).11

Prejudice under Rule 19(b), like impairment of an absent party's

rights under Rule 19(a)(2)(i), implicates principles of

collateral estoppel or issue preclusion. Under Pennsylvania law

11
. Federal Rule of Civil Procedure 19(b) provides:

(b) Determination by Court Whenever Joinder
not Feasible. If a person as described in
subdivision (a)(1)-(2) hereof cannot be made
a party, the court shall determine whether in
equity and good conscience the action should
proceed among the parties before it, or
should be dismissed, the absent person being
thus regarded as indispensable. The factors
to be considered by the court include: [1] to
what extent a judgment rendered in the
person's absence might be prejudicial to the
person or those already parties; [2] the
extent to which, by protective provisions in
the judgment, by the shaping of relief, or
other measures, the prejudice can be lessened
or avoided; [3] whether a judgment rendered
in the person's absence will be adequate; [4]
whether the plaintiff will have an adequate
remedy if the action is dismissed for
nonjoinder.

Fed. R. Civ. P. 19(b).
on issue preclusion,12 a party may be precluded from relitigating

an issue only if:
"(1) the issue decided in the prior
adjudication was identical with the one
presented in the later action; (2) there was
a final judgment on the merits; (3) the party
against whom the plea is asserted was a party
or in privity with a party to the prior
adjudication; and (4) the party against whom
it is asserted has had a full and fair
opportunity to litigate the issue in question
in a prior action."

Janney, 11 F.3d at 409 n.12 (quoting Sanders v. Sanders, 558 A.2d

556, 560 (Pa. Super. Ct. 1989) (citation omitted), allocatur

denied, 578 A.2d 930 (Pa. 1990)). Thus, if the landlord was in

privity with J.P. Morgan and Widener and they adequately

represented its interests, WALP would be collaterally estopped.

See id. at 410. Yet, under Rule 19(b), unlike Rule 19(a),

collateral estoppel is only a necessary condition of dismissal,

not a necessary and sufficient condition.

Though it would be logically inconsistent for J.P.

Morgan to succeed in this federal action on its defense that no
lease existed with respect to the tortious interference claim,

and the landlord to lose in the state court action because the

state court decided the parties' actions and oral communications

brought a lease into existence, logical inconsistency does not

12
. The parties do not dispute that Pennsylvania law applies in
this diversity action. All lease negotiations occurred in
Pennsylvania, the object of the purported lease is located there,
and the draft leases specifically provided that the lease was to
be governed by Pennsylvania law.
make an absent party indispensable. See Field v. Volkswagenwerk

AG, 626 F.2d 293, 301-02 (3d Cir. 1980) ("[T]he possibility of a

subsequent adjudication that may result in a judgment that is

inconsistent as a matter of logic [does not] trigger the

application of Rule 19.") (emphasis added).

In the district court, WALP offered to agree to be

bound by any determination of the lease issue, even if not

joined, provided Schulman would also agree to be bound. WALP

specifically informed the district court that it could
submit an affidavit . . . in which it would
agree to be bound by a decision rendered in
this action as to the existence of a lease
and would expect, in return, plaintiff's
acknowledgement and stipulation that he would
be bound by [the district court's]
determination of the lease issue so that
plaintiff would not seek to relitigate the
issue in state court. If WALP were to submit
such an affidavit and plaintiff such an
acknowledgment and stipulation, there would
be no need to join WALP as a party defendant
and there would be no possibility of further
procedural wrangling in the state court on
the lease issue.

Letter from Leonard S. Baum, Esq., counsel for Mortgagees, to

District Court dated February 16, 1993, Exh. "B" of Memorandum of

Law of Appellees to this Court dated March 11, 1994. Schulman

declined this offer and no such affidavit or stipulation was

filed. We think that Schulman, even absent this stipulation,

would be bound by the district court's resolution of the issue

concerning existence of the lease. Given WALP's willingness to
be bound, any judgment rendered in WALP's absence would be

mutually dispositive of the case.

C.

Because the mortgagee's counterclaim for a declaratory

judgment on the lease's existence mirrors an essential element of

Schulman's own claim, i.e. the existence of a lease, we do not

think the district court abused its discretion when it concluded

Schulman should not be able to demand WALP's presence as a

condition of an order adjudicating the merits of the dispute over

the lease's existence.13 Dismissal under Rule 19(b) is subject

to a district court's discretionary analysis of equitable

considerations, as is its decision to entertain a request for a

declaratory judgment. In either case we do not think the

district court abused its discretion. The equities favor WALP

and the mortgagee, not Schulman, because it was Schulman who

chose to divide this dispute between two independent forums and

then rejected WALP's proposal to stipulate that any decision in

the district court would be binding on both of them in the

ongoing state court proceedings. Accordingly, we conclude the

district court had subject matter jurisdiction over the merits of

13
. In addition, we think J.P. Morgan's interest in the lease
Schulman asserts can be analogized to that of a third party
beneficiary. According to Wright & Miller, "[i]n cases in which
the beneficiary is a party, the courts uniformly reject the
argument that all of the original parties to the contract must be
joined." 7 Charles A. Wright, Arthur R. Miller & Mary K. Kane,
Federal Practice and Procedure § 1613 at 186 (1986) (footnote
omitted).
whether J.P. Morgan's counterclaim is treated as such or as no

more than a redundant defense to Count I of Schulman's complaint.

It therefore follows that we also have appellate jurisdiction to

decide the issues the parties have raised about the lease's

existence on their merits.

IV.

Turning to the merits of that issue, Schulman argues

that a valid, enforceable lease exists because he relied on

Kelter's assurances that he would obtain one as well as the FKB

employees' confirmed acceptance of the final draft.14 Schulman

relies on Emerman v. Baldwin, 142 A.2d 440 (Pa. Super. Ct. 1958).

There, defendants orally agreed to lease a house to plaintiffs

for two years at a specified price. Id. at 443. Defendants

acknowledged the agreement as to terms by letter but in the

letter stated the agreement was nevertheless subject to execution

and delivery of defendants' standard lease form. Id. Under the

circumstances, the court held that the minds of the parties had

met on the essential provisions of the lease and a valid

leasehold agreement was made because the form's provisions were

14
. The elements of intentional interference with existing
contractual relations are: (1) the existence of a contractual
relationship; (2) an intent on the part of the defendant to harm
the plaintiff by interfering with those contractual relations;
(3) the absence of privilege or justification for the
interference; and (4) actual damages resulting from the
defendant's conduct. Neish v. Beaver Newspapers, Inc., 581 A.2d
619, 625 (Pa. Super. Ct.), allocatur denied, 593 A.2d 421 (Pa.
1990).
known to plaintiffs and the defendants believed the negotiations

had resulted in a binding contract. Id. at 445.

Emerman is distinguishable from this case. The

defendants in Emerman expressed their willingness to accept the

terms agreed upon during the negotiations as a binding contract

and objectively indicated they intended the executed standard

form would be a mere formality, serving only as evidence of the

agreed upon terms. In contrast, here WALP always made clear its

intent not to be bound by any lease until a written lease was

executed. Paragraph 57 of the January 31, 1992, draft lease,

which Schulman contends embodies all of the terms of the

purported lease, expressly bars any agreement from taking effect

until both the landlord and tenant have signed and delivered it.

It provides in a distinctive, capitalized typeface:
57. Delivery For Examination. DELIVERY OF
THE LEASE TO TENANT SHALL NOT BIND LANDLORD
IN ANY MANNER, AND NO LEASE OR OBLIGATIONS OF
LANDLORD SHALL ARISE UNTIL THIS INSTRUMENT IS
SIGNED BY BOTH LANDLORD AND TENANT AND
DELIVERY IS MADE TO EACH.

App. at A-150. Schulman was on notice of WALP's intent not to be

bound until it signed the lease throughout the negotiations.

Schulman and his attorneys reviewed each of the four draft

leases. All contained this provision and they never objected to

it. Schulman's attorney expressly cautioned him on the necessity

of formal execution. Schulman concedes WALP never signed any of

the draft leases.
 Despite the clear language of paragraph 57, Schulman

argues that the January 31, 1992, draft lease and the two letters

he received from FKB employees in February 1992 create a

sufficient writing to evidence the lease terms. His argument

might be sufficient to overcome the defense of the statute of

frauds, but the issue here is whether parties whose minds had met

on the need for a formal fully executed document before any

binding contract arose consummated their agreement, not whether

there was sufficient written evidence of the proposed terms of

that agreement. Paragraph 57 explicitly requires the signing and

delivery of the lease itself. The letters' references to the

draft as a lease did not transform it into one. Under

Pennsylvania law, when one party has expressed an intent not to

be bound until a written contract is executed, the parties are

not bound until that event has occurred. See Essner v.

Shoemaker, 143 A.2d 364 (Pa. 1958). In this case, no lease could

exist until WALP executed and delivered it.15 In response to the

mortgagee's motion for summary judgment, Schulman points to

nothing that could create a genuine issue of fact on the

15
. Schulman argues the district court exceeded or abused its
authority under the Declaratory Judgment Act by ruling on the
existence of the lease. We agree with the dissent that the
district court could have decided this case by assuming the lease
existed and so refusing to reach or decide the mortgagees'
counterclaim for a declaratory judgment. We are unable to agree,
however, that it was inappropriate for the district court to rule
on the counterclaim. Resolution of the existence of a lease is
essential to disposition of Schulman's claim of intentional
interference with existing contractual relations. Therefore, we
have also considered the merits of the lease issue and concluded
that no lease existed.
existence of a binding lease. For the same reasons, Schulman's

alternate argument based on Valvano v. Galardi, 526 A.2d 1216,

1220 (Pa. Super. Ct. 1987) that commencement of operations and

payment of rent to WALP is part performance sufficient to take

the case outside Pennsylvania's statute of frauds, Pa. Stat. Ann.

tit. 68, § 250.202 (1994), also fails. The district court did

not err by granting summary judgment in favor of the mortgagees

on Schulman's claim for intentional interference with existing

contractual relations.

V.

Schulman also asserts a claim for intentional

interference with prospective contractual relations.16 To

succeed, Schulman must show the prospective contract has an

objectively reasonable probability of coming into existence. See

Thompson Coal Co. v. Pike Coal Co., 412 A.2d 466, 471 (Pa. 1979).

We think there is sufficient evidence in this record to withstand

summary judgment on the issue of whether Schulman had a

reasonable probability of obtaining a lease from WALP absent the

mortgagee's interference.17 We must therefore consider whether

the mortgagee's conduct was privileged.18

16
. The elements of this tort are: (1) a prospective contractual
relation; (2) intent to harm the plaintiff by preventing the
relation from occurring; (3) absence of privilege or
justification on the defendant's part; and (4) resulting damage.
See Silver v. Mendel, 894 F.2d 598, 601-02 (3d Cir.) (citing
Thompson Coal Co. v. Pike Coal Co., 412 A.2d 466, 471 (Pa.
1979)), cert. denied, 496 U.S. 926 (1990).
17
. We believe there is a genuine issue of fact as to whether
there was a reasonable probability of Schulman's obtaining a
 The Pennsylvania Supreme Court has "repeatedly looked

to the Restatement as authority for the elements of a cause of

action for intentional interference with existing contract

relations." Adler, Barish, Daniels, Levins & Creskoff v.

Epstein, 393 A.2d 1175, 1182 n.13 (Pa. 1978) (adopting

Restatement of Torts §§ 766, 767 as definition of intentional

interference), appeal dismissed and cert. denied, 442 U.S. 907

(1979). It has also adopted portions of the Restatement relating

to intentional interference with prospective contractual

relations. See Glenn v. Point Park College, 272 A.2d 895, 897

(Pa. 1971). Section 769 of the Restatement (Second) of Torts

excuses interference committed by a person with a financial

interest in another's business if that interest may be affected

(..continued)
lease absent the mortgagee's interference. Although Schulman
argues Kelter did not begin communicating his displeasure with
Maxi's until after speaking with Pfeiffer, he conceded in
deposition and hearing testimony in the state ejectment action
that Kelter began complaining almost immediately after Maxi's
opened. That opening, in Schulman's own words, occurred "on or
about December 2, 1991, well before the grand opening party" on
December 12, 1991 and prior to Pfeiffer communicating her
displeasure. Thus, Kelter's opinion may have been uninfluenced
by Pfeiffer. Nevertheless, Schulman might have been able to get
Kelter to change his mind absent the mortgagee's objections
because Kelter initially appeared willing to work out the
problems he noted and suggested various improvements after
expressing his displeasure.
18
. The Pennsylvania Supreme Court has not adopted the language
of the Restatement (Second) of Torts § 766B (1977) that favors an
analysis of "proper" conduct rather than "privileged." Thus, in
cases to which Pennsylvania law applies, we must consider
privilege in analyzing claims of interference with prospective
contractual relations. See Advent Sys. Ltd. v. Unisys Corp., 925
F.2d 670, 673 (3d Cir. 1991).
by commercial relations between others. Restatement (Second) of

Torts § 769 (1979). It provides:
One who, having a financial interest in the
business of a third person[,] intentionally
causes that person not to enter into a
prospective contractual relation with
another, does not interfere improperly with
the other's relation if he

(a) does not employ wrongful means and

(b) acts to protect his interest from
being prejudiced by the relation.

Id. (emphasis added); see also Yaindl v. Ingersoll-Rand Co., 422

A.2d 611, 625 (Pa. Super. 1980) (citing Restatement (Second) of

Torts § 769 approvingly), abrogation on other grounds recognized

by Yetter v. Ward Trucking Co., 585 A.2d 1022 (Pa. Super. Ct.

1991) (citing Paul v. Lankenau Hosp., 569 A.2d 346 (Pa. 1990) and

Clay v. Advanced Computer Applications, 559 A.2d 917 (Pa. 1989)).

As the district court recognized, illustration 1 to that section

is similar to this case. Illustration 1 provides:
A provides the financial backing for B's
theatrical production. The arrangement is in
the form of a loan for the purposes of the
production. While B undertakes to repay the
loan in any event, in fact the chances of
repayment depend upon the success of the
play. B is about to engage C to play the
leading role. Under the conditions stated in
Clauses (a) and (b), A's interference with
the prospective relation by causing B not to
have C play that role is not improper.

Restatement (Second) of Torts § 769 cmt. c, illus. 1. The

interest of a mortgage lender is clearly an economic or financial

interest that falls within the scope of the privilege. See,
e.g., Cloverleaf Dev., Inc. v. Horizon Fin. F.A., 500 A.2d 163,

167 (Pa. Super. Ct. 1985) (lender acted in its own financial

interest by demanding higher interest rate, thereby interfering

with sale of mortgage).

Here, the mortgagee who is charged with interference

loaned WALP $62 million for renovations; of that amount only

$56,280 was allocated to Maxi's. Schulman argues this minimal

financial interest is insufficient to justify the mortgagee's

conduct. Schulman also argues the mortgagee's aesthetic concerns

are invalid because there is no evidence Schulman could not pay

the rent as agreed. Schulman misses the point. J.P. Morgan has

$62 million tied up in the Widener Building and if the building

doesn't succeed in attracting up-scale tenants, J.P. Morgan's

ability to recoup its loan is jeopardized. To the extent Maxi's

appearance would harm the building's ability to attract first-

class tenants, J.P. Morgan's concerns are valid. WALP implicitly

acknowledged this by granting the mortgagee the right to

disapprove tenants.

Interference is also privileged when the actor believes

in good faith that his legally protected interest may otherwise

be impaired by the performance of the contract. See Advent Sys.,

Ltd. v. Unisys Corp., 925 F.2d 670, 673 (3d Cir. 1991); Geofreeze

Corp. v. C. Hannah Constr. Co., 588 F. Supp. 1341, 1345 (E.D. Pa.

1984); Cloverleaf, 500 A.2d at 168. Section 773 of the

Restatement (Second) of Torts excuses interference by persons

protecting legal interests. Restatement (Second) of Torts § 773

(1979). It provides:
 One who, by asserting in good faith a legally
protected interest of his own or threatening
in good faith to protect the interest by
appropriate means, intentionally causes a
third person not to perform an existing
contract or enter into a prospective
contractual relation with another does not
interfere improperly with the other's
relation if the actor believes that his
interest may otherwise be impaired or
destroyed by the performance of the contract
or transaction.

Id. (emphasis added); see also Kelly-Springfield Tire Co. v.

D'Ambro, 596 A.2d 867, 872 (Pa. Super. Ct. 1991) (relying on

Restatement (Second) of Torts section 773); Geofreeze, 588

F. Supp. at 1345-46 (citing section 773 approvingly). The

Restatement gives an actor this defense only if it has a legally

protected interest and, in good faith, asserts the interest or

threatens to protect it by appropriate means. Restatement

(Second) of Torts § 773 cmt. a.

The Mortgage and Loan Documents WALP and Widener

executed expressly prohibit WALP from entering into any lease
without Widener's prior written consent. Section 6.01.1 of the

Mortgage forbids WALP from executing leases without the

mortgagee's written consent. Section 9.01(k) makes WALP's sale,

conveyance, encumbrance, or other transfer of control without the

mortgagee's prior written consent an event of default. Section

10.01 again forbids transfers of any kind without the mortgagee's

prior written consent. WALP also covenanted in section 4(k) of

the Assignment of Leases to Equitable Life that it would:
[n]ot lease any part of the Property, or
renew or extend the term of any Lease of any
 part of the Property without, in each case,
the prior written consent of the Assignee or
as expressly provided for in the Loan
Agreement[.]

App. at A-410.19 In the instant case, Widener acted in good

faith pursuant to its own reserved, contractual right in the

mortgage and loan documents between it and WALP to oversee the

selection of the Widener Building tenants.20

19
. The only exception to the written approval requirement is
that leases may be granted without the lender's approval if done
"in strict accordance with the provisions of the Loan Agreement."
App. at A-399. The Loan Agreement exempts only those leases
which "prior to the Closing, . . . demise[] less than 5,000
square feet of Rentable Area and which otherwise compl[y]" with
the other agreement provisions. App. at A-427. Although
Schulman's space occupies only 1,407 square feet, he does not
contend his lease took effect "prior to the Closing," which
occurred on June 8, 1990.
20
. Schulman argues Pennsylvania law does not require
a prospective tenant to search the public records for a mortgage
that may have restricted the landlord's right to lease the
property in question. Generally, under Pennsylvania law a
mortgage, recorded or not, does not affect title to property, but
a lessee's interest may nevertheless be subordinated to a
mortgage, as reflected in Schulman's draft lease. See DeMarco v.
City of Philadelphia, 494 A.2d 875, 876 (Pa. Commw. Ct. 1985).
Our research has not revealed any Pennsylvania cases directly
supporting either party's position on the issue of record notice.
The draft leases, however, all contained a subordination clause
putting Schulman on constructive notice of the existence of
mortgage documents. Schulman also knew Pfeiffer was connected
with the lender and that she wanted to review the draft leases.

Whether notice of the mortgagee's interest and the tenant's
express subordination to the rights of the mortgagee allow J.P.
Morgan to proceed directly against WALP, the owner, is thus a
question we do not decide. It is unnecessary to resolve it
because WALP never executed a lease and Widener clearly reserved
its right to approve Schulman's lease and its acts to that end
are privileged under Restatement (Second) of Torts § 773.
 Thus, the mortgagee's conduct is not improper based on

both its financial and legal interests in the transaction.

VI.

For the foregoing reasons the order of the district

court will be affirmed.

ROBERT D. SCHULMAN, t/a MAXI'S EXPRESS, Appellant v.
J.P. MORGAN INVESTMENT MANAGEMENT, INC.; WIDENER FUNDING CORP.,
INC., No. 93-1888
_________________________________________________________________

ROSENN, Circuit Judge, concurring and dissenting.

I agree with the majority's conclusion that the

district court did not err by granting summary judgment in favor

of the defendants on Schulman's claim for intentional

interference with existing contractual relations. However, I

part company with the majority's characterization of J.P.
Morgan's counterclaim and its decision to sustain the district

court's ruling on the amended counterclaim involving the

existence of a lease between Schulman and Widener Associates

Limited Partnership (WALP). I therefore respectfully concur and

dissent.

I.

This is an action by Schulman against the defendants

for intentional interference in contractual relations. Before
Schulman initiated this action, WALP filed an ejectment action in

the Philadelphia County Court of Common Pleas to evict Schulman.

That action, which was pending at the time Schulman filed this

suit, inevitably must test the existence of a lease between the

Schulman and WALP. There was no point, therefore, for the

district court to decide an issue already pending in the state

court and which was not essential to the disposition of the

matter before it. In this federal action, the issue is limited

to whether the defendants intentionally interfered with

Schulman's contractual rights.

The majority concedes that the district court could

have disposed of this case by assuming, without deciding, that

WALP and Schulman had agreed upon the terms of the lease.

Moreover, as discussed by the majority in Part III, the

defendants acted in good faith pursuant to their contractual

rights to protect their legal interests. Therefore, even

assuming the existence of a lease, the defendants' actions were

privileged and did not constitute intentional interference.

The district court should not have decided the question

of whether Schulman had a valid lease to any space at the Widener

Building because that issue was pending in the state court

action, essentially involves a matter of state law, and the

elements for a declaratory judgment were not present.21 The

21
. The defendants contend that this court does not have
jurisdiction to decide whether the district court erred in
granting summary judgment for them on their counterclaim because
Schulman only appealed from the August 11, 1993 Order granting
Declaratory Judgment Act, 28 U.S.C. § 2201, calls for the federal

courts to exercise discretion in determining whether to involve

themselves in a declaratory judgment action. As set forth most

recently by this court in United States v. Pennsylvania, Dep't of

Envtl. Resources, 923 F.2d 1071 (3d Cir. 1991), this court

considers the following factors when determining whether the

federal forum is appropriate for a declaratory action: (1) the

likelihood that a federal court declaration will resolve the

uncertainty of obligation which gave rise to the controversy; (2)

the convenience of the parties; (3) the public interest in

settlement of the uncertainty of obligation; and (4) the

availability of and relative convenience of other remedies. Id.

at 1075 (citations omitted).

The Pennsylvania, Dep't of Envtl. Resources court also

discussed Terra Nova Ins. Co. v. 900 Bar, Inc., 887 F.2d 1213 (3d

Cir. 1989), in which the court upheld the district court's stay

of an insured's claim in light of a pending state tort action

because of the general policy of restraint when the same issues

are pending in a state court and an avoidance of duplicative

litigation. 923 F.2d at 1075-76; see also Brillhart v. Excess
Ins. Co., 316 U.S. 491, 495 (1942) (federal court should consider

(..continued)
summary judgment in favor of the defendants, and not from the
April 27, 1993, Order granting the defendants leave to amend
their answer to include the counterclaim. However, the August
11, 1993 Order from which Schulman appealed specifically granted
the defendants' motion for summary judgment on their counterclaim
and declared that Schulman had no legally enforceable lease.
whether state court suit "present[s] the same issues, not

governed by federal law, between the same parties" and whether

state court is better able to settle controversy). "[E]ven if a

declaratory judgment would clarify the parties' legal rights, it

should ordinarily not be granted unless 'the parties' plans of

actions are likely to be affected by a declaratory judgment.'"

Armstrong World Industries, Inc. v. Adams, 961 F.2d 405, 412 (3d

Cir. 1992) (citation omitted).

The district court's decision to resolve the

declaratory action raised by the counterclaim substantially

ignores these factors. The federal action can be resolved

without deciding the essential issue in the pending state court

ejectment action. There is no public interest involved in either

action and the state action provides an available and convenient

forum for the disposition of a contractual suit arising under

state law. The declaratory judgment did not serve any useful

purpose because the declaration was not necessary for the

settlement of obligations between the parties in this case or for

the disposal of this action.

The declaration of the district court improperly

encroaches upon the state court, which is currently addressing

the issue of the existence of a lease between Schulman and WALP.

The district court acknowledged that its declaration that there

was not a valid contract between Schulman and WALP "may not

resolve the question still pending . . . in state court regarding
what rights Schulman has against a landlord who allegedly

represents it can freely enter into a lease, when in fact it

cannot." The district court's declaration will have the effect

of either binding the state court in its decision making or

requiring Schulman to undertake duplicative litigation. In any

event, it can only serve to complicate or confuse the state court

proceedings. The majority's ruling on the lease is not necessary

to this action and relies on a matter in which a key figure to

the lease is not a party to the proceedings before this court.

Finally, the parties would not be inconvenienced by deference to

the state court because the federal action properly granted the

defendants' motion for summary judgment on Schulman's claims

against them, and the state court could resolve in timely fashion

the issue of the existence of a lease. Thus, I believe this

court should reverse the district court's grant of summary

judgment for the defendants on their counterclaim.

II.

Additionally, the majority's extensive discussion of

Rule 19 is not necessary or relevant to the disposition of this

appeal. As the majority concedes, the district court had

ancillary jurisdiction over the issue raised in the counterclaim

without regard to diversity under 28 U.S.C. § 1367 (West 1993).

(Maj. Op. at 12). I further disagree with the majority's

characterization of J.P. Morgan's counterclaim as a redundant

defense. This issue has never been raised by the parties and
there is no indication that J.P. Morgan did not intend to file a

counterclaim for a declaratory judgment.

As authority for its "relabeling" the counterclaim as a

defense, the majority cites Fed.R.Civ.P. 8(c). Rule 8(c),

however, empowers a trial court at the pleading stage to correct

a party's mistaken designation of a counterclaim as a defense if

justice so requires. The rule does not provide any authority for

this court to do so on appeal. Rather, our review is constrained

by the district court's treatment of the pleading as a

counterclaim. Therefore, I see no justification to relabel J.P.

Morgan's counterclaim as a defense, and no need to discuss Rule

19 in light of the district court's ancillary jurisdiction over

the counterclaim.

Moreover, the majority concludes that the equities

favor WALP and the defendants, and not Schulman, because Schulman

chose to divide this dispute between two independent forums and

then rejected WALP's proposal to stipulate that any decision in

the district court would be binding in the state court. (Maj.

Op. at 19). However, WALP, not Schulman, chose to file the

ejectment action in the Philadelphia County Court of Common

Pleas. Moreover, there was no reason for Schulman to stipulate

to a binding resolution by the district court because that court

was not the appropriate forum for resolution of an issue

essentially involving state law pending in a prior action

instituted by WALP in state court. Finally, the equities may
fall in favor of Schulman in the ejectment action because Kelter,

the principal acting on WALP's behalf, sought out Schulman to

discuss plans to operate Maxi's food establishment in the lobby

of the Widener Building. "It is undisputed that both Kelter and

Schulman anticipated that a lease would be executed" and Schulman

invested $35,000 of his own money toward construction costs.

(Maj. Op. at 5).

III.

In conclusion, the district court should not have

decided the question presented by the defendants' counterclaim as

to whether there was in fact a lease because the elements for a

declaratory judgment were not present. Furthermore, the

declaration of the district court improperly encroaches upon the

litigation then pending in the state court. Accordingly, I

respectfully dissent from the majority's opinion.