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ALA, Inc. v. CCAIR

UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT


filed: July 7, 1994.

ALA, INC., A MARYLAND CORPORATION; LARRY H. SCHATZ, AN INDIVIDUAL RESIDING IN, AND A CITIZEN OF, THE STATE OF NEW YORK,
v.
CCAIR, INC., A DELAWARE CORPORATION, ALA, INC. AND LARRY H. SCHATZ, APPELLANTS

On Appeal From the United States District Court For the District of New Jersey. (D.C. Civ. No. 93-cv-01554).

Before: Becker and Lewis, Circuit Judges, and Pollak, District Judge.*fn*

Author: Becker

Opinion OF THE COURT

BECKER, Circuit Judge.

This appeal requires us to construe the statute of frauds governing the sale of securities under Article 8 of the Uniform Commercial Code ("U.C.C.") as enacted by New Jersey and North Carolina, the two jurisdictions relevant to this dispute. The question presented is whether the district court, pursuant to Federal Rule of Civil Procedure 12(b)(6), properly dismissed the claim of plaintiff ALA, Inc. ("ALA") that defendant CCAIR, Inc. ("CCAIR") was in breach of an alleged agreement to sell ALA a controlling block of its common stock on the ground that the statute of frauds, § 8-319 of the U.C.C., N.J. Stat. Ann. § 12A:8-319; N.C. Gen. Stat. § 25-8-319, made the alleged agreement unenforceable.

ALA assigns two grounds of error. First it argues that the district court erred in holding that a letter outlining the terms of the proposed deal that CCAIR's CEO Kenneth Gann sent to ALA's investment banker Larry Schatz was insufficient to satisfy § 8-319(a) of the statute, which provides that the statute of frauds is satisfied if there is a "writing signed by the party against whom enforcement is sought . . . sufficient to indicate that a contract has been made for sale of a stated quantity of described securities at a defined or stated price." ALA also submits that the district court's order dismissing the action was premature because § 8-319(d), which provides that the statute of frauds is satisfied if a party against whom enforcement is sought admits in a "pleading, testimony or otherwise in court that a contract was made," entitled it to an opportunity for discovery during which such an admission might be obtained, and hence precluded the granting of a Rule 12(b)(6) motion.

Although we agree with the district court that the Gann letter does not sufficiently indicate that a contract had been made and thus that § 8-319(a) was not satisfied, we agree with ALA that § 8-319(d) of the statute prevents the district court from granting a Rule 12(b)(6) dismissal here. In order to give effect to § 8-319(d), ALA must have some opportunity to secure an admission from CCAIR. We will therefore vacate the order of dismissal and remand the case to the district court with directions to grant ALA limited discovery to determine whether CCAIR will admit that an agreement was made. We note that at the close of that limited discovery, the district court may again address the statute of frauds issue in a motion for summary judgment.

I. BACKGROUND

In late 1992 and early 1993, ALA, an investment firm based in New Jersey, became interested in making an investment in CCAIR, an airline based in North Carolina, which operates the commuter airline USAir Express. In early January 1993, it instructed investment banker Larry Schatz (also an appellant in this case) to approach CCAIR and explore the possibility of a major stock transaction. Schatz contacted the officers of CCAIR and told them that he had a client who was interested in purchasing a sizeable stake in the company. The CCAIR officials expressed interest and a meeting was scheduled for January 18. On that date, Schatz, acting as the agent for ALA, met with upper level management of CCAIR, including a majority of the CCAIR Board of Directors, in North Carolina.

According to ALA's complaint, the two companies struck a deal at the meeting in which ALA agreed to buy and CCAIR agreed to sell approximately 3.5 million shares of authorized but unissued CCAIR stock for $3.15 per share or some lesser figure to be agreed upon by the parties. Although the agreement reached at the meeting was oral, it was, ALA submits, memorialized by a letter Kenneth Gann, President and CEO of CCAIR, sent to Schatz on January 18, 1993 (the "Gann letter"). The Gann letter stated:

Dear Mr. Schatz:

It was a pleasure meeting with you today and exploring with you the investment potential of CCAIR (the "Company").

If your clients acquire the remaining approximately 3.5 million authorized but unissued common shares of the Company on or before ninety (90) days from the date hereof for $3.15 per share or such lesser amount [as] may be agreed by your client and the Company, we agree to pay you at the time of said share acquisition, an investment banking fee of $.15 per share.

In connection therewith, we will cause the appointment of two (2) nominees of your client to serve as board members of the Company for the remaining unexpired term of this current board.

Further, we agree to provide your client with such information as may be requested by your client in connection with the customary and permissible due diligence in a private place by a company whose securities are publicly traded.

The Company's agreement to complete this transaction is of course subject to our reasonable approval of your clients, the prior sale of the same securities and the requisite corporate approvals of both the Company and the purchasers.

If the foregoing accurately sets forth your understanding of the proposed transaction, please so indicate by executing and returning to me a copy of this letter.

Thank you.

CCAIR, Inc.

By:(s) Kenneth W. Gann

Kenneth W. Gann,

President

Gann signed the letter, and Schatz agreed and accepted its terms by returning a signed copy.

Shortly after January 18, the parties took a number of steps to consummate the deal. On January 25 they entered into a confidentiality agreement in which they agreed not to disclose confidential information exchanged between them. On January 26, the representatives for each party met in New Jersey to discuss how financial and other confidential information would be exchanged, and they decided that further refinement of the transaction would be handled by counsel. On February 3, counsel for ALA forwarded a term sheet to CCAIR outlining the terms for the purchase of CCAIR common stock. It proposed that ALA acquire the stock at $2.65 per share.

On February 11, however, CCAIR abruptly terminated Discussions with ALA and told ALA that it no longer wished to complete the transaction. Although ALA tried to revive the negotiations by submitting a revised term sheet offering to purchase the securities for $3.15 per share, CCAIR was unmoved.*fn1 Once it became clear to ALA that it could not persuade CCAIR to close the deal, both ALA and Schatz sued CCAIR in federal district court in New Jersey for breach of the agreement allegedly reached on January 18. ALA sought specific performance of the contract and Schatz sought a commission.*fn2

Instead of answering the complaint, CCAIR filed a motion to dismiss for failure to state a claim upon which relief may be granted. See Fed. R. Civ. P. 12(b)(6).*fn3 The district court granted the motion, holding that § 8-319 made the agreement alleged by ALA unenforceable.

Section 8-319, the statute of frauds for securities transactions, provides in pertinent part:

A contract for the sale of securities is not enforceable by way of action or defense unless:

(a) There is some writing signed by the party against whom enforcement is sought or by his authorized agent or broker, sufficient to indicate that a contract has been made for sale of a stated quantity of described securities at a defined or stated price; [or]

(d) The party against whom enforcement is sought admits in his pleading, testimony or otherwise in court that a contract was made for the sale of a stated quantity of described securities at a defined or stated price.*fn4

N.J. Stat. Ann. § 12A:8-319.*fn5 During the motion proceedings, ALA argued that the Gann letter was a writing sufficient to satisfy subsection (a) and that the language of subsection (d) made any Rule 12(b)(6) motion premature because it was possible for CCAIR to make admissions during the course of discovery that would allow ALA to satisfy the statute.

The district court rejected these contentions and granted the motion to dismiss. The court held that the Gann letter did not satisfy § 8-319(a) because it did not constitute a contract for the sale of securities. It rejected ALA's claim that § 8-319(d) made the dismissal premature because "taking into account the allegations in [the plaintiffs'] complaint and the exhibits attached thereto, it seems highly unlikely that plaintiffs could ever obtain this admission."*fn6 ALA claims that both of these grounds for dismissal were erroneous. Our review of the order granting the dismissal is plenary.*fn7

II. DISCUSSION

A. The Rule 12(b)(6) Standard

In considering whether a complaint should have been dismissed for failure to state a claim upon which relief can be granted, the court must consider only those facts alleged in the complaint and accept all of the allegations as true. Hishon v. King & Spalding, 467 U.S. 69, 73, 104 S. Ct. 2229, 2232, 81 L. Ed. 2d 59 (1984). Unless the plaintiff can prove no set of facts in support of the claim that would entitle him to relief, the complaint should not be dismissed. Conley v. Gibson, 355 U.S. 41, 45-46, 78 S. Ct. 99, 102, 2 L. Ed. 2d 80 (1957); D.P. Enters., Inc. v. Bucks County Community College, 725 F.2d 943, 944 (3d Cir. 1984). When reviewing a complaint, a court should consider not only the allegations contained in the complaint itself but also the exhibits attached to it which the complaint incorporates pursuant to Federal Rule of Civil Procedure 10(c). See Fed. R. Civ. P. 10(c) ("A copy of any written instrument which is an exhibit to a pleading is a part thereof for all purposes."); cf. Pension Benefit Guar. Corp. v. White Consol. Indus., 998 F.2d 1192, 1196 (3d Cir. 1993) (holding that a court may also consider an "undisputedly authentic document that a defendant attaches as an exhibit to a motion to dismiss if the plaintiff's claims are based on the document"), cert. denied, 126 L. Ed. 2d 655, 114 S. Ct. 687 (1994).*fn8

Finally, a complaint may be subject to dismissal under Rule 12(b)(6) when an affirmative defense, like the statute of frauds, appears on its face. Continental Collieries, Inc. v. Shober, 130 F.2d 631, 635 (3d Cir. 1942) ("where the defect [of the statute of frauds] appears on the face of the pleading, the question may be raised on motion to dismiss for insufficiency");see 5A Charles A. Wright & Arthur R. Miller, Federal Practice and Procedure § 1357, at 358-59 (1990) (citing cases).*fn9 With these standards in mind, we now consider each ground for the district court's dismissal.

B. Section 8-319(a) and the Gann Letter

An oral agreement for the sale of securities is unenforceable unless the party seeking to enforce the agreement produces a writing signed by the party against whom enforcement is sought "sufficient to indicate that a contract has been made for sale of a stated quantity of securities at a defined or stated price." N.J. Stat. Ann. § 12A:8-319(a). The writing need not be the contract itself, and it need not contain all of the terms of the agreement to satisfy § 8-319(a). It must merely evidence the existence of the contract, state the quantity of securities agreed to be sold, and state the price.*fn10

ALA argues that the Gann letter satisfies the writing requirement of § 8-319(a). The language upon which ALA relies appears in the second paragraph of the letter:

If your clients acquire the remaining approximately 3.5 million authorized but unissued common shares of the Company on or before ninety (90) days from the date hereof for $3.15 per share or such lesser amount [as] may be agreed by your client and the Company, we agree to pay you at the time of said share acquisition, an investment banking fee of $.15 per share.

This paragraph, ALA contends, contains both a stated quantity and a stated price and, since the letter is signed by Kenneth Gann, the letter satisfies the three critical terms of § 8-319(a).

CCAIR counters that this language in the Gann letter did not confirm the existence of a deal for a stated quantity and price. In its submission, the letter, taken as a whole, merely promised to pay Schatz a commission "if" the deal went through. At most, says CCAIR, the Gann letter revealed the existence of a proposed transaction contingent on future successful negotiations. And writings that merely evidence the existence of negotiations, CCAIR argues, do not satisfy § 8-319(a). We agree. Although there are no New Jersey cases on point, all of the case law interpreting § 8-319(a), including case law from North Carolina, has held that writings that merely evidence that the parties were negotiating a contract are insufficient to satisfy § 8-319(a). See Oakley v. Little, 49 N.C. App. 650, 272 S.E.2d 370, 373 (N.C. App. 1980) ("Where writings only represent negotiations for agreements to be made in the future the courts have held under U.C.C. § 2-201 that they were not binding contracts. . . . Plaintiff's exhibits are insufficient to show a contract for the sale of the stock [under § 8-319(a)], because they merely represent tentative negotiations." (citations omitted)); Cramer v. Devon Group, Inc., 774 F. Supp. 176, 182-183 (S.D.N.Y. 1991) (holding that letters showing the parties were negotiating a purchase of shares were insufficient to satisfy § 8-319(a)); Anderson Chem. Co. v. Portals Water Treatment, 768 F. Supp. 1568, 1577-78 (M.D. Ga. 1991) (holding that an extremely detailed letter of intent contemplating subsequent definitive purchase and merger agreements was insufficient to satisfy § 8-319(a)), aff'd in part and rev'd in part without op., 971 F.2d 756 (11th Cir. 1992); cf. Conaway v. 20th Century Corp., 491 Pa. 189, 420 A.2d 405, 412-413 (Pa. 1980) (holding that writings which merely show a plan, a proposal, or an offer which looked to some future relationship but which do not evidence an existing contract are insufficient to satisfy U.C.C. § 2-201) (citing cases).*fn11

Thus, although ALA correctly argues that the Gann letter need not contain all of the terms of the contract, it must at least establish the existence of a contract. This it does not do. The language of the letter does no more than reference past negotiations and contemplate a proposed transaction. The price term in the letter is fluid. Moreover, the letter states that the completion of the "proposed transaction" was "subject to our reasonable approval of your clients, the prior sale of the same securities and the requisite corporate approvals." In our view, a fair reading of the letter shows that it was simply a confirmation on the part of Gann that CCAIR would pay Schatz a commission if the deal went through.*fn12

At all events, the Gann letter leaves considerable doubt as to whether there was any agreement at all. And "'if the proffered writings permit doubt as to the existence or nature of the contractual relationship, the inquiry is terminated and the agreement deemed unenforceable.'" Cramer, 774 F. Supp. at 183 (quoting Horn & Hardart Co. v. Pillsbury Co., 888 F.2d 8, 11 (2d Cir. 1989)). Therefore the letter does not satisfy § 8-319(a) and hence we turn to the question whether § 8-319(d) precludes a Rule 12(b)(6) dismissal.

C. Section 8-319(d) and Rule 12(b)(6)

Section 8-319(d) of the U.C.C. provides that an oral contract for the sale of securities is enforceable by way of action or defense if "the party against whom enforcement is sought admits in his pleading, testimony, or otherwise in court that a contract was made for the sale of a stated quantity of described securities at a defined or stated price." See N.J. Stat. Ann. § 12A:8-319(d). According to ALA, § 8-319(d) gives a plaintiff the right to ask the defendant to admit the fact that an oral contract was made, and thus precludes the granting of a Rule 12(b)(6) motion on statute of frauds grounds in most cases because to do so would deprive the plaintiff of any opportunity to get such an admission. We agree.

The purpose of the statute of frauds in the U.C.C. is evidentiary -- to protect people from fraudulent claims that a contract did or did not exist.*fn13 See 2 William Hawkland, Uniform Commercial Code Series § 2-201:01 (1992) ("The purpose of the statute of frauds is to protect people against misunderstanding and fraud arising out of alleged oral contracts."); 7 id. at § 8-319:01 (stating that § 8-319 mirrors § 2-201 and that cases interpreting § 2-201 should also apply to cases involving § 8-319).*fn14 Section 8-319(d) is an important component of this general policy since judicial admissions are good evidence that an agreement had been made. And § 8-319(d) shows that the drafters of the U.C.C. recognized that fraud can work in both directions: while § 8-319(a) protects defendants against fraudulent claims that a contract has been made, § 8-319(d) protects plaintiffs from fraudulent claims that a contract has not been made.

In order for § 8-319(d) to function, the plaintiff must have some opportunity to obtain an admission from the defendant. A Rule 12(b)(6) motion, however, would derail the plaintiff's case pre-pleading and allow the defendant to defeat a cause of action on an oral contract before the plaintiff has any opportunity to seek an admission that a contract existed. Allowing a defendant to dispose of a case on a Rule 12(b)(6) motion would eviscerate § 8-319(d) and potentially allow a defendant to avoid the obligations of an oral contract into which he or she actually entered.*fn15

Thus many courts have concluded that motions to dismiss based on the statute of frauds are improper. See Weiss v. Wolin, 60 Misc. 2d 750, 303 N.Y.S.2d 940, 943-44 (Sup. Ct. 1969) (explaining that to sustain a demurrer under § 8-319 would deprive the plaintiff of an opportunity to get the defendant to admit "in his pleadings, testimony or otherwise" that a contract was made); Garrison v. Piatt, 113 Ga. App. 94, 147 S.E.2d 374, 375-76 (Ga. App. 1966) ("[Section 8-319(d)] was designed to prevent the statute of frauds itself from becoming an aid to fraud, by prohibiting one claiming the benefit of the statute who admits in the case the oral contract sued upon."); cf. Lewis v. Hughes, 276 Md. 247, 346 A.2d 231, 236 & n.10 (Md. 1975) (rejecting a demurrer based on § 2-201); M & W Farm Serv. Co. v. Callison, 285 N.W.2d 271 (Iowa 1979) (same); Duffee v. Judson, 251 Pa. Super. 406, 380 A.2d 843, 847 (Pa. Super. 1977) (same); Dangerfield v. Markel, 222 N.W.2d 373, 378 (N.D. 1974) (same); see also Boylan v. G.L. Morrow Co., 63 N.Y.2d 616, 468 N.E.2d 681, 688, 479 N.Y.S.2d 499 (N.Y. 1984) (Meyer, J., Dissenting) ("If a defendant could prevail simply by raising the Statute of Frauds in a prepleading motion to dismiss, the admission exception would be vacuous. The defendant never would have to face the choice of admitting or denying the contract . . . . The provision is designed to discourage fraudulent claims and not to caution against the making of unwise and ill-considered promises." (internal citation and quotations omitted)); 2 Hawkland, Uniform Commercial Code Series at § 2-201:06 n.2 (stating that a motion to dismiss is improper unless the plaintiff is given a full opportunity to elicit an admission in pretrial discovery proceedings).

These cases (and the Hawkland treatise) are persuasive, and we believe that New Jersey and North Carolina would find them so. We therefore hold that the district court should have given ALA an opportunity to elicit an admission from CCAIR before dismissing the lawsuit. Because ALA was given no such opportunity, the dismissal of the lawsuit was premature and must be set aside. We recognize that our construction of the statute essentially means that U.C.C. § 8-319 will rarely provide the means for a motion to dismiss.*fn16 However, for the reasons we have stated, we believe that such a result is contemplated by the statute and is, in fact, reasonable.

We also do not think our holding will significantly increase the costs of litigation. The purposes of § 8-319(d) will be served if the district court grants to the plaintiff enough time to engage in a limited program of discovery with a view to permitting the plaintiff a fair opportunity to procure an admission. The court could then consider in fairly short order a motion for summary judgment. What is important is that the plaintiff be given some chance to obtain an admission from the defendants.*fn17

The order of the district court granting the motion to dismiss will be vacated and the case remanded to the district court for further proceedings consistent with this opinion. The parties shall bear their own costs.


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