1997 Decisions

Opinions of the United

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Precedential or Non-Precedential: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
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 

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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. 

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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. 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 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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