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D ock e t 96-7351

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. e du/thir dc ir c uit_1997/93Filed 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 o f the United States
District Court for the Northern District of Califor nia, 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 distri ct court adopting the report and recommendation of a magistr ate judge and dismissing Flight Systems' suit under Fed . R. Civ. P. 12(b)(6). We will vacate the order and rema nd 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 co mes to us after dismissal under Rule 12(b)(6), the facts a re presented as alleged by Flight Systems.

In April 1995, Electronic Data Systems ("EDS"), a T exas corporation, contacted Flight Systems, a Pennsylvan ia corporation, through a broker about renting space i n an office building at 505 Fishing Creek Road in Lewisb erry, 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 desi red. On the same day, Flight Systems removed the property f rom the rental market.

2Intensive negotiations followed, culminating in a 5 9-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 aut horized
to bind EDS to the terms of the lease. Merriman sta ted 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 execu tion. Katzman approved the proposed modification and conv eyed 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 Syste ms president Robert Shaffner received a telephone mess age 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, 1 995, when EDS' attorney informed Flight Systems that EDS ' acceptance of the lease agreement had been continge nt on procuring additional business in the Harrisburg are a. 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 o f Common Pleas, alleging breach of contract and breac h 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 s tate a claim upon which relief may be granted. A magistrat e judge recommended that the court grant EDS' motion, and t he district court issued an order dismissing the compl aint.

II. BREACH OF CONTRACT

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

3alleged the existence of a signed writing that woul d satisfy

Pennsylvania's statute of frauds governing real pro perty leased for more than three years, 68 Pa. Stat. Ann. S 250.202, although it alleged the existence of a f ive-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 ins uperable barrier to recovery by the plaintiff. See Continent al Collieries v. Shober, 130 F.2d 631, 635-36 (3d Cir. 1942) (hol ding that affirmative defenses may be raised on a 12(b)( 6) motion "where the defect appears on the face of the pleadi ng"). 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 p laintiff 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 frui tless exercise. Under Pennsylvania law, a lease of real p roperty for a term of more than three years must be made in writing and signed by the parties creating the leas e. 68 Pa. Stat. Ann. S 250.202. However, this statute of frau ds 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 S portswear, Inc. v. Clearfield Foundation, 474 A.2d 1142, 1150 (Pa. Super. Ct. 1984) (citing cases). Pennsylvania court s have declared that the purpose of the statute of frauds is to shield persons with interests in land from being de prived of those interests by perjury, not to arm contracting parties with a sword they may use to escape bargains they r ue. Fannin v. Cratty, 480 A.2d 1056, 1059 (Pa. Super. C t. 1984) (citing Zlotziver, 49 A.2d at 781 and Gerlock v. Gabel, 112 A.2d 78, 81 (Pa. 1955)); accord Sferra v. Urlin g, 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 de fendant

4admits under oath that a contract was formed, the

purposes of the statute of frauds are served, Zlotz iver, 49 A.2d at 781, and the contract will be afforded full legal effect, Sferra v. Urling, 195 A. at 425. Allowing E DS to dispose of the breach of contract claim before it h as even submitted an answer would enable EDS to use the sta tute of frauds as a sword, in contravention of the statu te's purpose. Cf. ALA, Inc. v. CCAIR, Inc., 29 F.3d 855, 862-63 (3d Cir. 1994) (finding dismissal on a 12(b)(6) mot ion improper where applicable New Jersey statute of fra uds contained an exception for admissions).

Moreover, should EDS raise the statute of frauds as an affirmative defense in its answer, Flight Systems m ay be able to produce writings that satisfy the statute o f 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 satisf ied with `some note or memorandum' that is adequate . . . to convince the court that there is no serious possibi lity of consummating fraud by enforcement." In re Estate of Beeruk, 241 A.2d at 758 (quoting 2 Corbin on Contra cts S 498 (1950)). As for lease agreements, "no particu lar form of words is necessary to constitute a lease and . . . any writing is sufficient which establishes the intenti on of one party voluntarily to dispossess himself of the prem ises, for a consideration, and of the other to assume the pos session for a prescribed period." Morrisville Shopping Cent er v. Sun Ray Drug Co., 112 A.2d 183, 186 (Pa. 1955) (citatio ns 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 t he signed writing was signed with reference to the unsigned w ritings. See Target Sportswear, 474 A.2d at 1147 (citing Fle ming 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 ru le governing the sufficiency of separate writings to constitute a me morandum is set forth
in S 208:

5the 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 wr itings 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 prod uced consist of an offer and acceptance, both writings m ust pertain to the same terms without modification. Tar get 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 S ystems' contention that the June 28, 1995 memorandum from Donna Merriman of EDS, referring to and annexing a proposed final modification to the draft lease agre ement, constituted a signed writing. We agree with the dis trict 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 ye ars. Flomar, 210 A.2d at 255. However, we do not agree t hat 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 sa me terms, Target Sportswear, 474 A.2d at 1149-50, and sufficiently state those terms, In re Estate of Bee ruk, 241 A.2d at 758. Any mark or symbol -- including a type written name -- will be deemed to constitute a signature fo r the purposes of the statute if it is used with the decl ared or

___________________________________________________ ______________

`The memorandum may consist of several writi ngs,

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

(b) though one writing only is signed if

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

(ii) the signed writing refers to the unsig ned writing, or

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

"

63 A.2d at 124.

6apparent intent to authenticate the memorandum.

Hessenthaler v. Farzin, 564 A.2d 990, 993 (Pa. Supe r. Ct. 1989) (finding mailgram which stated, "We, Dr. Mehd i and Marie Farzin, accept the offer of $520,000 for our property at 6175 and 6185 Hocker Drive Harrisburg, Pennsylva nia," was sufficiently reliable to constitute a "signed" writing) (surveying case law). As the Hessenthaler court not ed, "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 ED S' legal affairs department. Moreover, the memorandum on whi ch Merriman's name and initial appear refers specifica lly to the "proposed Lease w/Flight Systems, Inc. at 505 F ishing Creek Road, Lewisberry, PA." Cf. id. at 994 (findin g the inclusion of the precise terms of the sales agreeme nt, together with the sellers' names, sufficiently reve aled the seller's intention to adopt the writing as their ow n). These factors lend reliability to the memorandum, and it may, therefore, satisfy the statute of frauds when consi dered 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 allege d the existence of an oral contract, precluding dismissal of its complaint. The statute of frauds does not void cont racts relating to land that fail to comply with its requi rements; it only renders unenforceable the durational term of t hose 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 E DS that a five-year lease was formed, specific perform ance may be awarded. See Sferra, 195 A. at 425. If, on the o ther hand, Flight Systems only succeeds in proving the existence of an oral lease agreement, Flight System s cannot recover the loss of its bargain unless the contract was induced by fraud, Fannin, 480 A.2d at 1060 (citing Seidlek

7v. Bradley, 142 A. 914, 915 (Pa. 1928)).2 It may, h owever,

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 or al contract was formed on June 28, 1995 when Donna
Merriman of EDS forwarded the final lease modificat ion to Ronald Katzman, Flight Systems' attorney, and Katzm an approved the change and conveyed Flight Systems' acceptance to EDS. Thus, offer and acceptance are a lleged. 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 up on, the contract was created, and the later writing is simp ly evidence of the agreement. Nakles v. Union Real Est ate Co., 204 A.2d 50, 51 (Pa. 1964);3 Taylor v. Stanley Co., 158 A. 157, 159 (Pa. 1932); see also Goldman v. McShain, 2 47 A.2d 455, 458-59 (Pa. 1968) (vacating judgment on t he pleadings where defendant had not signed lengthy le ase document since plaintiff alleged that the parties h ad 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 fo r 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, si nce it presents similar facts. The plaintiffs sought to lease space for a b usiness. Id. at 50-51. After some negotiation with the landlord, a rent wa s agreed upon, the parties shook hands, and the landlord accepted a ch eck for the first month's rent. Id. at 51. That day, the landlord sen t the plaintiffs a

lease agreement, which they signed and returned. Id. The landlord did not sign the lease, and later informed the plaintiffs t hat 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 par ties shook hands and the landlord accepted the check; the written le ase was a mere formality. Id. At the very least, the court conclud ed, a tenancy at will

was created and plaintiffs had a valid cause of action. Id. at 51-52.

8inappropriate 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 sale s agreement). Of course, EDS may dispute the contenti ons that an agreement was reached, or that Merriman or Katzman were authorized to bind the parties; but th at
would raise an issue of fact for determination at t rial.

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 t o negotiate the lease agreement in good faith because it concealed the fact that its willingness to enter in to the lease agreement was contingent on finding additional busi ness in the Harrisburg area. The district court dismissed t his claim, finding that Flight Systems had failed to al lege any facts suggesting the existence of an agreement to n egotiate in good faith. Again, we disagree.

The Pennsylvania Supreme Court has not decided whether a cause of action for breach of a duty to n egotiate in good faith exists in the Commonwealth. See Chann el Home Centers v. Grossman, 795 F.2d 291, 299 (3d Cir

. 1986); Jenkins v. County of Schuylkill, 658 A.2d 38 0, 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 contra ct. 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 manifeste d an intention to be bound by an agreement to negotiate in good faith; (2) the terms of the agreement were sufficie ntly definite to be enforced; (3) consideration was conf erred, id. at 299, and (4) the agreement was breached by bad f aith

conduct.

9We conclude that Flight Systems has alleged suffici ent

facts to survive the motion to dismiss. Flight Syst ems contends that it agreed to remove the property at 5 05 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, F light Systems has alleged it agreed to negotiate a lease for a specific property on specific terms within a specif ic time, and it conferred consideration on EDS by removing t he property from the market for the duration of that p eriod. Flight Systems argues that EDS manifested its inten tion to be bound by establishing terms for a lease in the A pril 20, 1995 letter and engaging in intensive negotiations in the following two months to finalize the lease agreemen t. 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 inte nd to
execute the lease if it could not obtain additional business in the Harrisburg area. These allegations are suffi cient to
state a cause of action.

EDS counters Flight Systems' argument by pointing o ut that the April 20, 1995 letter includes the caveat, "This is strictly an outline and is contingent upon EDS inte rnal approval and a mutually executed lease document." T his evidence merely raises an issue of material fact; i t 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 Le asing v. Morrison Co., 454 A.2d 555, 560 (Pa. Super. Ct. 198 2) (noting that the actions of parties are significant and substantial evidence in determining whether they in tended

___________________________________________________ ______________

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 s olely on a letter of
intent containing a similar caveat, which negated the infe rence that both parties had manifested assent to be bound.

10to be bound by an agreement) (citing Fenestra, Inc. v. JohnMcShain, 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 cavea t was intended to ensure that the April 20, 1995 letter w ould not be construed as a lease, while still demonstrating that EDS intended to oblige itself to negotiate in good fait h. As we noted in Channel Home Centers, 795 F.2d at 298, a l ease and an obligation to negotiate in good faith are se parate 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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