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 Inc. Precedential or Non-Precedential: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
Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_1994
Recommended Citation "Schulman v. J.P. Morgan Inv. Mgmt. Inc." (1994). 1994 Decisions. Paper 133. http://digitalcommons.law.villanova.edu/thirdcircuit_1994/133
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___________
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.
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.
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).
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.