Flight Sys Inc v. Elec Data Sys Corp

Opinions of the United
1997 Decisions States Court of Appeals
for the Third Circuit

4-29-1997

Flight Sys Inc v. Elec Data Sys Corp
Precedential or Non-Precedential:

Docket 96-7351

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Recommended Citation
"Flight Sys Inc v. Elec Data Sys Corp" (1997). 1997 Decisions. Paper 93.
http://digitalcommons.law.villanova.edu/thirdcircuit_1997/93

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Filed April 29, 1997

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

No. 96-7351

FLIGHT SYSTEMS, INC.,

Appellant

v.

ELECTRONIC DATA SYSTEMS CORPORATION,

Appellee

ON APPEAL FROM THE
UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF PENNSYLVANIA
(D.C. Civil No. 95-01724)
District Judge: Hon. Sylvia H. Rambo

Argued Wednesday, January 22, 1997

Before: NYGAARD and LEWIS, Circuit Judges,
and SCHWARZER, District Judge*

(Opinion filed April 29, 1997)

_________________________________________________________________
*The Honorable William W. Schwarzer, Senior Judge of the United States
District Court for the Northern District of California, sitting by
designation.
 Steven E. Grubb, Esq. (Argued)
Goldberg, Katzman & Shipman
320E Market St.
P.O. Box 1268, Strawberry Square
Harrisburg, Pa. 17108

Counsel for Appellant

Diana S. Donaldson, Esq.
Paul G. Gagne, Esq. (Argued)
Schnader, Harrison, Segal & Lewis
1600 Market St., Suite 3600
Philadelphia, Pa. 19103

Counsel for Appellee

OPINION OF THE COURT

NYGAARD, Circuit Judge.

Flight Systems, Inc. appeals an order by the district court
adopting the report and recommendation of a magistrate
judge and dismissing Flight Systems' suit under Fed. R.
Civ. P. 12(b)(6). We will vacate the order and remand for
further proceedings consistent with this opinion.

I. FACTUAL AND PROCEDURAL BACKGROUND

This diversity case arises from a contract dispute
governed by the laws of Pennsylvania. Because it comes to
us after dismissal under Rule 12(b)(6), the facts are
presented as alleged by Flight Systems.

In April 1995, Electronic Data Systems ("EDS"), a Texas
corporation, contacted Flight Systems, a Pennsylvania
corporation, through a broker about renting space in an
office building at 505 Fishing Creek Road in Lewisberry,
Pennsylvania. Flight Systems was amenable, and the
broker sent Flight Systems a letter dated April 20, 1995
outlining the terms of the five-year lease EDS desired. On
the same day, Flight Systems removed the property from
the rental market.

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Intensive negotiations followed, culminating in a 59-page
blackline draft lease agreement. On June 28, 1995, Ronald
Katzman, the attorney representing Flight Systems,
received a memorandum from Donna Merriman, an EDS
employee who, Flight Systems alleges, was fully authorized
to bind EDS to the terms of the lease. Merriman stated that
if one final modification, which she attached, was
agreeable, Katzman should contact Barbara Stone of EDS
and the lease agreement would be prepared for execution.
Katzman approved the proposed modification and conveyed
his acceptance of the lease to Stone the same day. Flight
Systems contends that a contract was formed at this point.

When Katzman spoke to Stone on June 28, 1995, she
told him that the lease agreement would be executed
immediately by EDS, and then forwarded by overnight
delivery to him for signature by Flight Systems'
representatives. Instead, the next day Flight Systems
president Robert Shaffner received a telephone message
that EDS no longer wished to lease the property at 505
Fishing Creek Road. Katzman tried to find out what had
happened, but received no answer until August 15, 1995,
when EDS' attorney informed Flight Systems that EDS'
acceptance of the lease agreement had been contingent on
procuring additional business in the Harrisburg area. Since
EDS had not succeeded, it did not need more office space.
Flight Systems says that it had never been told of this
contingency.

Flight Systems sued EDS in the Pennsylvania Court of
Common Pleas, alleging breach of contract and breach of
obligation to negotiate in good faith. EDS removed the case
to the United States District Court. EDS then made a
motion under Rule 12(b)(6) of the Federal Rules of Civil
Procedure to dismiss the complaint for failure to state a
claim upon which relief may be granted. A magistrate judge
recommended that the court grant EDS' motion, and the
district court issued an order dismissing the complaint.

II. BREACH OF CONTRACT

The district court found that Flight Systems could not
prevail on its breach of contract claim because it had not

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alleged the existence of a signed writing that would satisfy
Pennsylvania's statute of frauds governing real property
leased for more than three years, 68 Pa. Stat. Ann.
S 250.202, although it alleged the existence of a five-year
lease. We disagree.

On a Rule 12(b)(6) motion, an affirmative defense, such
as the statute of frauds defense raised by EDS, is
appropriately considered only if it presents an insuperable
barrier to recovery by the plaintiff. See Continental Collieries
v. Shober, 130 F.2d 631, 635-36 (3d Cir. 1942) (holding
that affirmative defenses may be raised on a 12(b)(6) motion
"where the defect appears on the face of the pleading").
Applying similar reasoning, the Pennsylvania courts have
concluded that a waivable statute of frauds defense may
serve as a basis for judgment on the pleadings only when
trial would be a "fruitless exercise" because the plaintiff
fails to allege facts in his pleadings that take an oral
contract outside the statutory prohibition. Keil v. Good, 356
A.2d 768, 771 (Pa. 1976).

Allowing this matter to proceed would not be a fruitless
exercise. Under Pennsylvania law, a lease of real property
for a term of more than three years must be made in
writing and signed by the parties creating the lease. 68 Pa.
Stat. Ann. S 250.202. However, this statute of frauds is a
waivable defense. Blumer v. Dorfman, 289 A.2d 463, 468
(Pa. 1972). Consequently, it will not bar recovery if EDS
fails to raise the defense in its answer, or admits to the
existence of a contract in pleadings or testimony. Zlotziver
v. Zlotziver, 49 A.2d 779, 781 (Pa. 1946); Target Sportswear,
Inc. v. Clearfield Foundation, 474 A.2d 1142, 1150 (Pa.
Super. Ct. 1984) (citing cases). Pennsylvania courts have
declared that the purpose of the statute of frauds is to
shield persons with interests in land from being deprived of
those interests by perjury, not to arm contracting parties
with a sword they may use to escape bargains they rue.
Fannin v. Cratty, 480 A.2d 1056, 1059 (Pa. Super. Ct.
1984) (citing Zlotziver, 49 A.2d at 781 and Gerlock v. Gabel,
112 A.2d 78, 81 (Pa. 1955)); accord Sferra v. Urling, 195 A.
422, 426 (Pa. 1937); Axler v. First Newport Realty Investors,
420 A.2d 720, 722 (Pa. Super. Ct. 1980) (citing In re Estate
of Beeruk, 241 A.2d 755, 758 (Pa. 1968)). If the defendant

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admits under oath that a contract was formed, the
purposes of the statute of frauds are served, Zlotziver, 49
A.2d at 781, and the contract will be afforded full legal
effect, Sferra v. Urling, 195 A. at 425. Allowing EDS to
dispose of the breach of contract claim before it has even
submitted an answer would enable EDS to use the statute
of frauds as a sword, in contravention of the statute's
purpose. Cf. ALA, Inc. v. CCAIR, Inc., 29 F.3d 855, 862-63
(3d Cir. 1994) (finding dismissal on a 12(b)(6) motion
improper where applicable New Jersey statute of frauds
contained an exception for admissions).

Moreover, should EDS raise the statute of frauds as an
affirmative defense in its answer, Flight Systems may be
able to produce writings that satisfy the statute of frauds.
To ensure that the statute of frauds is not used as a sword
to perpetrate fraud, the Pennsylvania Supreme Court has
stressed that adjudicators should "always be satisfied with
`some note or memorandum' that is adequate . . . to
convince the court that there is no serious possibility of
consummating fraud by enforcement." In re Estate of
Beeruk, 241 A.2d at 758 (quoting 2 Corbin on Contracts
S 498 (1950)). As for lease agreements, "no particular form
of words is necessary to constitute a lease and . . . any
writing is sufficient which establishes the intention of one
party voluntarily to dispossess himself of the premises, for
a consideration, and of the other to assume the possession
for a prescribed period." Morrisville Shopping Center v. Sun
Ray Drug Co., 112 A.2d 183, 186 (Pa. 1955) (citations
omitted). The writing need not be titled a "lease." Id. at 187.
Furthermore, the statute of frauds can be satisfied by
several writings if at least one writing is signed by the party
to be charged and refers to the unsigned writing or it
appears from examination of all the writings that the signed
writing was signed with reference to the unsigned writings.
See Target Sportswear, 474 A.2d at 1147 (citing Fleming v.
Strayer, 63 A.2d 122, 124 (Pa. Super. Ct. 1949)).1 Because
_________________________________________________________________

1. In full, Fleming states, "The general requisites of a memorandum are
listed in Restatement, Contracts, S 207, and the rule governing the
sufficiency of separate writings to constitute a memorandum is set forth
in S 208:

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the statute of frauds pertaining to leases, 68 Pa. Stat. Ann.
S 250.202, requires that a lease be signed by both the
landlord and tenant, Flight Systems must produce writings
signed by both parties, see Flomar Corp. v. Logue, 210 A.2d
254, 255 (Pa. 1965), although both signatures need not
appear on the same writing. Where the writings produced
consist of an offer and acceptance, both writings must
pertain to the same terms without modification. Target
Sportswear, 474 A.2d at 1149-50 (quoting 37 C.J.S. Statute
of Frauds S 180(c)).

In a footnote, the district court rejected Flight Systems'
contention that the June 28, 1995 memorandum from
Donna Merriman of EDS, referring to and annexing a
proposed final modification to the draft lease agreement,
constituted a signed writing. We agree with the district
court that this writing alone would not satisfy the statute of
frauds, since S 250.202 requires the signatures of both
parties to a lease agreement for more than three years.
Flomar, 210 A.2d at 255. However, we do not agree that the
memorandum could not satisfy the statute of frauds
requirement of a "signed" writing if Flight Systems also
produced writings it signed which pertain to the same
terms, Target Sportswear, 474 A.2d at 1149-50, and
sufficiently state those terms, In re Estate of Beeruk, 241
A.2d at 758. Any mark or symbol -- including a typewritten
name -- will be deemed to constitute a signature for the
purposes of the statute if it is used with the declared or
_________________________________________________________________

`The memorandum may consist of several writings,

(a) if each writing is signed by the party to be charged and the
writings indicate that they relate to the same transaction, or

(b) though one writing only is signed if

(i) the signed writing is physically annexed to the other writing
by
the party to be charged, or

(ii) the signed writing refers to the unsigned writing, or

(iii) it appears from examination of all the writings that the
signed writing was signed with reference to the unsigned writings.'
"

63 A.2d at 124.

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apparent intent to authenticate the memorandum.
Hessenthaler v. Farzin, 564 A.2d 990, 993 (Pa. Super. Ct.
1989) (finding mailgram which stated, "We, Dr. Mehdi and
Marie Farzin, accept the offer of $520,000 for our property
at 6175 and 6185 Hocker Drive Harrisburg, Pennsylvania,"
was sufficiently reliable to constitute a "signed" writing)
(surveying case law). As the Hessenthaler court noted, "the
proper, realistic approach . . . is to look to the reliability of
the memorandum, rather than to insist on a formal
signature." Id. In this instance, Donna Merriman's
typewritten name has been initialed and is part of a
facsimile transmission made on the stationery of EDS' legal
affairs department. Moreover, the memorandum on which
Merriman's name and initial appear refers specifically to
the "proposed Lease w/Flight Systems, Inc. at 505 Fishing
Creek Road, Lewisberry, PA." Cf. id. at 994 (finding the
inclusion of the precise terms of the sales agreement,
together with the sellers' names, sufficiently revealed the
seller's intention to adopt the writing as their own). These
factors lend reliability to the memorandum, and it may,
therefore, satisfy the statute of frauds when considered in
conjunction with other documents.

Finally, even if Flight Systems ultimately fails to obtain
an admission that a contract was formed, and fails to
produce signed writings that satisfy the statute of frauds,
Flight Systems has nevertheless sufficiently alleged the
existence of an oral contract, precluding dismissal of its
complaint. The statute of frauds does not void contracts
relating to land that fail to comply with its requirements; it
only renders unenforceable the durational term of those
contracts. See Ferri v. Liberatoscioli, 13 A.2d 45, 45-46 (Pa.
1940). Flight Systems may recover for breach of an oral
lease, although the damages available are limited. If Flight
Systems satisfies the statute of frauds, either by producing
signed writings or by obtaining an admission from EDS
that a five-year lease was formed, specific performance may
be awarded. See Sferra, 195 A. at 425. If, on the other
hand, Flight Systems only succeeds in proving the
existence of an oral lease agreement, Flight Systems cannot
recover the loss of its bargain unless the contract was
induced by fraud, Fannin, 480 A.2d at 1060 (citing Seidlek

7
v. Bradley, 142 A. 914, 915 (Pa. 1928)).2 It may, however,
recover any consideration paid to EDS and expenses
incurred on the faith of the contract. Fannin, 480 A.2d at
1060-61 (citing Polka v. May, 118 A.2d 154, 156 (Pa.
1955)); see also Seidlek, 142 A. at 915 (noting the
availability of nominal damages, at a minimum).

In its complaint, Flight Systems alleged that an oral
contract was formed on June 28, 1995 when Donna
Merriman of EDS forwarded the final lease modification to
Ronald Katzman, Flight Systems' attorney, and Katzman
approved the change and conveyed Flight Systems'
acceptance to EDS. Thus, offer and acceptance are alleged.
The fact that the parties intended subsequently to execute
a signed writing does not preclude a finding that a contract
was formed: if the minds of the parties met and the
essential provisions of the contract were agreed upon, the
contract was created, and the later writing is simply
evidence of the agreement. Nakles v. Union Real Estate Co.,
204 A.2d 50, 51 (Pa. 1964);3 Taylor v. Stanley Co., 158 A.
157, 159 (Pa. 1932); see also Goldman v. McShain, 247
A.2d 455, 458-59 (Pa. 1968) (vacating judgment on the
pleadings where defendant had not signed lengthy lease
document since plaintiff alleged that the parties had
reached agreement and the document was merely a
formalization); Frankel v. Northeast Land Co., 570 A.2d
1065, 1068 (Pa. Super. Ct. 1990) (finding demurrer
_________________________________________________________________

2. If EDS were found to have terminated an at-will tenancy without
proper notice, Flight Systems could recover rent for the notice period.
See Fife v. Great Atlantic & Pacific Tea Co., 70 A.2d 369, 371 (Pa. Super.
Ct. 1950).

3. The Nakles case is especially pertinent here, since it presents similar
facts. The plaintiffs sought to lease space for a business. Id. at 50-51.
After some negotiation with the landlord, a rent was agreed upon, the
parties shook hands, and the landlord accepted a check for the first
month's rent. Id. at 51. That day, the landlord sent the plaintiffs a
lease
agreement, which they signed and returned. Id. The landlord did not
sign the lease, and later informed the plaintiffs that the space had been
rented to someone else. Id. The court held that an oral contract had been
formed on the day the rent was agreed upon, the parties shook hands
and the landlord accepted the check; the written lease was a mere
formality. Id. At the very least, the court concluded, a tenancy at will
was
created and plaintiffs had a valid cause of action. Id. at 51-52.

8
inappropriate where purchasers had signed sales
agreement, but realtors had only signed an addendum; the
trial court was required to accept the averments of the
complaint that the realtors had entered into a sales
agreement). Of course, EDS may dispute the contentions
that an agreement was reached, or that Merriman or
Katzman were authorized to bind the parties; but that
would raise an issue of fact for determination at trial.

In summary, the statute of frauds does not clearly
prevent recovery at this preliminary stage of the
proceedings, and dismissal under Rule 12(b)(6) was
inappropriate.

III. BREACH OF DUTY TO NEGOTIATE IN GOOD FAITH

Flight Systems alleges that EDS breached its duty to
negotiate the lease agreement in good faith because it
concealed the fact that its willingness to enter into the lease
agreement was contingent on finding additional business in
the Harrisburg area. The district court dismissed this
claim, finding that Flight Systems had failed to allege any
facts suggesting the existence of an agreement to negotiate
in good faith. Again, we disagree.

The Pennsylvania Supreme Court has not decided
whether a cause of action for breach of a duty to negotiate
in good faith exists in the Commonwealth. See Channel
Home Centers v. Grossman, 795 F.2d 291, 299 (3d Cir.
1986); Jenkins v. County of Schuylkill, 658 A.2d 380, 385
(Pa. Super. Ct.), alloc. denied, 666 A.2d 1056 (Pa. 1995).
However, we predicted in Channel Home Centers that
Pennsylvania would recognize such a cause of action. 795
F.2d at 299.

An agreement to negotiate in good faith is a contract. Id.
at 298-99. Therefore, the plaintiff states a cause of action
for breach of this duty when he alleges facts which, if
proven, demonstrate that (1) both parties manifested an
intention to be bound by an agreement to negotiate in good
faith; (2) the terms of the agreement were sufficiently
definite to be enforced; (3) consideration was conferred, id.
at 299, and (4) the agreement was breached by bad faith
conduct.

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We conclude that Flight Systems has alleged sufficient
facts to survive the motion to dismiss. Flight Systems
contends that it agreed to remove the property at 505
Fishing Creek Road from the rental market while
negotiating a lease agreement with EDS according to
explicit terms set forth in the letter dated April 20, 1995
from EDS' broker, on the understanding that a final
agreement would be reached by July 1, 1995. Thus, Flight
Systems has alleged it agreed to negotiate a lease for a
specific property on specific terms within a specific time,
and it conferred consideration on EDS by removing the
property from the market for the duration of that period.
Flight Systems argues that EDS manifested its intention to
be bound by establishing terms for a lease in the April 20,
1995 letter and engaging in intensive negotiations in the
following two months to finalize the lease agreement. A
promise by EDS to conclude negotiations by July 1, 1995
could constitute consideration, since it conferred a benefit
on Flight Systems by limiting the time the company was
obliged to keep the property off the rental market. Finally,
Flight Systems alleges that EDS acted in bad faith by
concealing from Flight Systems that it did not intend to
execute the lease if it could not obtain additional business
in the Harrisburg area. These allegations are sufficient to
state a cause of action.

EDS counters Flight Systems' argument by pointing out
that the April 20, 1995 letter includes the caveat, "This is
strictly an outline and is contingent upon EDS internal
approval and a mutually executed lease document." This
evidence merely raises an issue of material fact; it does not
preclude the claim since Flight Systems relies not only on
this letter but on EDS' course of conduct to argue that EDS
agreed to negotiate in good faith.4 See American Leasing v.
Morrison Co., 454 A.2d 555, 560 (Pa. Super. Ct. 1982)
(noting that the actions of parties are significant and
substantial evidence in determining whether they intended
_________________________________________________________________

4. Thus, Flight Systems' complaint differs from the dismissed complaint
at issue in Philmar Mid-Atlantic v. York St. Assoc., 566 A.2d 1253, 1255
(Pa. Super. Ct. 1989), where the plaintiff relied solely on a letter of
intent
containing a similar caveat, which negated the inference that both
parties had manifested assent to be bound.

10
to be bound by an agreement) (citing Fenestra, Inc. v. John-
McShain, Inc., 248 A.2d 838 (Pa. 1969) and Atlantic
Richfield Co. v. Razumic, 390 A.2d 736 (Pa. 1978)).
Moreover, a trier of fact might find that the caveat was
intended to ensure that the April 20, 1995 letter would not
be construed as a lease, while still demonstrating that EDS
intended to oblige itself to negotiate in good faith. As we
noted in Channel Home Centers, 795 F.2d at 298, a lease
and an obligation to negotiate in good faith are separate
and distinct contracts; Flight Systems is alleging the April
20, 1995 letter evinces the latter, not the former.

IV. CONCLUSION

For the foregoing reasons, we will vacate the order of the
district court 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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