Fairbrook Leasing, Inc. v. Mesaba Aviation, Inc.

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
___________

No. 04-2640
___________

Fairbrook Leasing, Inc., a Delaware *
corporation; Lambert Leasing, Inc., *
a Delaware corporation; Swedish *
Aircraft Holdings AR, a Swedish *
corporation, * Appeal From the United States
* District Court for the
Appellees, * District of Minnesota.
*
v. *
*
Mesaba Aviation, Inc., a Minnesota *
corporation, *
*
Appellant. *
___________

Submitted: January 10, 2005
Filed: May 19, 2005
___________

Before SMITH, HEANEY, and COLLOTON, Circuit Judges.
___________

HEANEY, Circuit Judge.

Appellees Fairbrook Leasing, Inc. (FLI), Lambert Leasing, Inc., and Swedish
Aircraft Holdings AR (collectively the Lessors) brought this declaratory judgment
action against Appellant, Mesaba Aviation, Inc. (Mesaba). The Lessors sought a
declaration that a March 7, 1996 Term Sheet Proposal (Term Sheet) constituted a
binding contract that required Mesaba to execute long-term aircraft leases within a
72- to 96-month range. The Lessors also requested a declaration that, pursuant to the
Term Sheet, they had the discretion to request four one-year extensions of the 72- to
96-month contemplated lease term.

On December 8, 2003, the district court1 entered summary judgment, declaring
the Term Sheet to be a binding contract, and that the basic lease duration dates for
each aircraft at issue were, at a minimum, between 72 and 96 months, subject to any
applicable head lease. The district court denied the Lessors’ summary judgment
motion with regard to the four one-year extensions because it concluded that this
portion of the Term Sheet was ambiguous. Following dismissal of the Lessors’
claims with prejudice, the district court entered final judgment on June 14, 2004.

Mesaba appeals from this judgment, arguing that the district court erred in
concluding that: (1) the Term Sheet constituted a binding contract under New York
law; (2) the parties’ conduct was consistent with the terms of the Term Sheet; (3)
Mesaba failed to negotiate in good faith toward a final binding agreement, entitling
the Lessors to performance of the terms of the Term Sheet; and (4) the Lessors’ claim
for declaratory relief is not time-barred. We affirm.

BACKGROUND

Mesaba is a regional airline that operates aircraft for the benefit of Northwest
Airlines. Mesaba issued a Request for Proposal (RFP) in August 1995 to obtain
aircraft to fulfill its pending co-sharing agreement with Northwest Airlines. The
Lessors responded to the RFP and offered to provide new Saab 340B+ and used Saab
340A aircraft. On March 7, 1996, Mesaba and the Lessors executed a document
entitled “Term Sheet Proposal for the Acquisition of Saab 340 Aircraft by Mesaba

1
The Honorable James M. Rosenbaum, United States Chief District Judge for
the District of Minnesota.

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Aviation, Inc.,” which described the sale of new and the lease of used aircraft. The
leasing transaction stated in relevant part, “FLI proposes to sublease twenty (20)
340A Aircraft to Mesaba, subject to existing subleases. Mesaba will also acquire
options for twelve (12) Option 340A Aircraft.” (Term Sheet at 1.)

The Term Sheet contemplates individual long-term subleases for each aircraft,
advance payments expected upon the delivery of the 340A aircraft, the length of the
subleases, the basic monthly rent per aircraft, the delivery schedule of the aircraft, and
Mesaba’s right to assign certain rights to Northwest in the event the code-sharing
agreement was not renewed before March 31, 1997. The Term Sheet also includes
a section entitled “Conditions Precedent and Effect of This Term Sheet,” which
defines the validity of the Term Sheet. A subsection entitled “Effect of this Term
Sheet” provides:

By signing this Term Sheet, SAAI, FLI and Mesaba evidence their
agreement to negotiate, execute, and deliver definitive documentation
in substantially the form and substance of the 2/18/96 drafts of the
above-listed documents no later than April 15, 1996; provided, however,
that in the event of any conflict between the terms set forth in this Term
Sheet and any such draft, the terms set forth in this Term Sheet shall
prevail.

(Term Sheet at 10.) The Term Sheet states that it is not effective unless it has been
signed and delivered to all parties, and that SAAI and FLI have received partial
payment. The Term Sheet also requires approval by the Board of Directors of all
parties. The parties agree that all conditions precedent to effectuating the Term Sheet
were fulfilled. The parties also agreed to modify the Term Sheet once Northwest
became involved in the negotiations. The Lessors agreed to provide a $13,000
monthly rent rebate from the Term Sheet’s specified $44,000 rent per aircraft.

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 In May 1996, while negotiations on final documents continued,2 Mesaba began
accepting delivery of 340A aircraft. Departing from the Term Sheet, the parties
executed short-term subleases ranging from two to three months for each aircraft,
instead of the long-term sublease of 72 to 96 months. After further negotiations, the
parties concluded only one long-term aircraft lease calling for a term of 96 months.
Notwithstanding the parties’ failure to complete a finalized agreement, the Lessors
continued to deliver, and Mesaba continued to accept, planes under short-term leases,
which were extended by agreement several times. Negotiations for long-term leases
for the 340A aircraft ultimately ceased in December 1998.

On July 1, 1997, Mesaba and Northwest executed a new ten-year code-sharing
agreement that referenced the Term Sheet. The agreement stipulated that no sublease
would be for a term longer than the term of the applicable head lease, and that the
monthly rent for each 340A aircraft should not exceed $31,000.

In December of 1997, Saab announced it would discontinue its manufacture of
the 340 model commercial aircraft. Despite concerns that the cost of maintenance
might increase as a result, Mesaba continued to accept delivery of Saab 340A aircraft.
Mesaba continued to operate its twenty-three Saab 340A aircraft through 2001, and
paid $31,000 per aircraft per month.

In 2001, Mesaba informed FLI that it was going to return some of the leased
aircraft. FLI protested that according to the Term Sheet, the aircrafts’ lease duration
had not expired. Mesaba argued it was bound only by the short-term leases, and once
those expired, it could return the aircraft at any time. In October 2002, Mesaba
ceased making lease payments for several of the Saab 340A aircraft. Consequently,

2
Although the Term Sheet stipulated an April 15, 1996 deadline for the
finalization of their agreement, this date was extended three times. By August 1996,
the parties had not finalized negotiations. They continued to negotiate for two more
years.

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the Lessors commenced this action. The district court granted the Lessors’ motion
for summary judgment in part, holding that the Term Sheet constituted a binding
contractual obligation, and that the Term Sheet expressly granted FLI the authority
to determine the lease duration, within the range of 72 to 96 months, subject to the
terms of any applicable head lease. The district court determined the Term Sheet was
unclear with respect to an issue concerning lease extensions beyond 96 months, and
declined to grant summary judgment to the Lessors on that issue. Mesaba appeals.

ANALYSIS

This court reviews the district court’s grant of summary judgment and its
interpretation of state law de novo. Salve Regina Coll. v. Russell, 499 U.S. 225, 231
(1991); Winthrop Res. Corp. v. Eaton Hydraulics, Inc., 361 F.3d 465, 468-69 (8th
Cir. 2004); Barry v. Barry, 78 F.3d 375, 379 (8th Cir. 1996). The parties agree that
New York law governs the issue presented to us.

The district court succinctly summarized New York’s interpretation of
preliminary agreements:

New York law recognizes two types of binding preliminary agreements.
The first, (“Type I”), arises when the parties agree on “all the points that
require negotiation” and is preliminary only as to form. The parties
have the right to demand performance of the transaction. The second,
(“Type II”), establishes a framework for agreement, and binds the parties
to negotiate in good faith within that framework. The parties are free to
walk away once they have “made a good faith effort to close the deal
and have not insisted on conditions that do not conform to the
preliminary writing.”

***

In each type of agreement, as in most contract cases, the parties’ intent
determines whether they are bound and to what extent. “To discern that

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 intent a court must look to the ‘words and deeds [of the parties] which
constitute objective signs in a given set of circumstances.’”

***

To assess whether the parties have demonstrated an intent to be bound
by a Type I agreement, a court considers (1) the language of the
agreement; (2) the existence of open terms; (3) whether there has been
partial performance; and (4) whether the agreement is of the type usually
committed to writing. For a Type II agreement, a court considers the
same four factors, plus a fifth – the context of the negotiations resulting
in the preliminary agreement.

Fairbrook Leasing, Inc., et al., v. Mesaba Aviation, Inc., 295 F. Supp.2d 1063, 1065-
70 (D. Minn. Dec. 8, 2003) (citations omitted); see also Adjustrite Sys., Inc. v. GAB
Bus. Servs, Inc., 145 F.3d 543, 549 n.6 (2d Cir. 1998); Arcadian Phosphates, Inc. v.
Arcadian Corp., 884 F.2d 69, 72 (2d Cir. 1989); Teachers Ins. & Annuity Assoc. of
Am. v. Tribune Co., 670 F. Supp. 491, 498-500 (S.D.N.Y. June 26, 1987). The
negotiations surrounding the Term Sheet and the parties’ conduct lead us to conclude
that the Lessors and Mesaba entered into a Type II agreement, binding the parties to
comply with the Term Sheet. We address each of the five factors relevant to the Type
II agreement inquiry below.

We first consider the language of the Term Sheet, and find it reveals the
parties’ intent to be bound. As the district court explained:

The Term Sheet’s length, detail, formality, and completeness lends
support to the finding that this document defines the parties’ obligations,
and is not a mere invitation for them to continue to negotiate. The Term
Sheet unambiguously states that, “By signing this Term Sheet, SAAI,
FLI, and Mesaba evidence their agreement to negotiate, execute and
deliver definitive documentation . . . .” This language does not indicate
a qualification or hesitation concerning the existence of an agreement;
it merely indicates that scrivener work–“definitive documentation”–

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 remains to be done. The Term Sheet’s language explicitly resolves
future issues which may arise as the conforming documents are drafted.
It does so by specifying that in the event of a conflict between the Term
Sheet’s terms and any subsequent drafts, the Term Sheet’s terms shall
prevail.

Fairbrook Leasing, 295 F. Supp.2d at 1070-71. Additionally, both parties initialed
the first ten pages of the Term Sheet and signed the document on the last page. They
agreed the Term Sheet would be governed by New York law in matters of
“construction, validity and performance.” Furthermore, the parties avoided making
the Term Sheet effective on the execution of formal documentation. The district court
was correct in concluding that the language of the Term Sheet indicates the parties
intended the document to be binding and enforceable.

We next consider whether there are sufficient open terms to conclude the
parties did not intend to be bound. Again, this factor favors the Lessors. “[A] court
should consider the broad framework of a contract in determining whether missing
terms are actually essential–that is, necessary to make the agreement legally binding.”
Shann v. Dunk, 84 F.3d 73, 79 (2d Cir. 1996). “Disputed terms are not to be
considered in isolation, but in the context of the overall agreement.” Id. (quotation
omitted). Mesaba claims the Term Sheet omitted maintenance and refurbishment
obligations, insurance obligations, limitations as to manner and location of use,
stipulated loss values, and return conditions and asserts these terms are essential and
open, precluding a binding agreement. The district court responded to this assertion
in this way:

The Court considers Mesaba’s objections on this ground to be cavils.
The Term Sheet sets out a commitment to obtain described aircraft . . . .
Other than the inconsequential absence of a stated delivery location,
there is no indication that either party has ever had the slightest
complaint about the date, timing, or place of delivery. The monthly

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 lease rate was not only established, but was satisfactorily modified by
the parties’ subsequent agreement.

Fairbrook Leasing, 295 F. Supp.2d at 1071-72. While we agree that the presence of
material open terms while negotiations continue suggests the parties do not intend to
be bound, the district court properly concluded that all of the essential terms had been
agreed upon in the Term Sheet. None of the open terms cited by Mesaba were
material, and were therefore inconsequential to the agreement.

Partial performance is the third factor in the analysis. A party seeking to avoid
an agreement who accepts performance tendered by a party seeking to enforce that
agreement is either estopped from denying the existence of the agreement because he
accepted the benefit of the very agreement that he is now seeking to avoid, or he is
bound to the agreement because his conduct in accepting the tendered performance
serves as an affirmative ratification of the existence of the agreement. See Merrill
Lynch Interfunding v. Argenti, 155 F.3d 113, 122 (2d Cir. 1998). The undisputed
evidence shows there has been prolonged, and in some cases, complete performance
of the agreement as set out by the Term Sheet. For a period of six years, the parties
complied with the majority of the terms and provisions delineated in the Term Sheet.
The district court explained, and no party disputes, that:

[p]laintiffs delivered, and defendant paid for, twenty-three aircraft, even
in the absence of final documents. This occurred using only the Term
Sheet. The parties’ performance continued, even recognizing that other
collateral matters might remain. These aircraft were unquestionably of
benefit to Mesaba, constituting as they did an essential part of its fleet.

Fairbrook Leasing, 295 F. Supp.2d at 1072. We agree the parties’ conduct signaled
they believed they were operating under a binding agreement, and find this factor
weighs in favor of the plaintiffs as well.

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 We next consider whether a written agreement is customary for the sort of
services and payments exchanged by the parties. It is clear that the parties
extensively negotiated and committed to writing the terms of their agreement in the
Term Sheet, and adjusted the terms of the agreement as required. Yet, the size of the
transaction, the nature of the assets being leased, and the length of the contemplated
leases appear to us to warrant not only a writing, but “a formal contract complete with
representations and warranties and the other standard provisions usually found in
sophisticated, formal contracts.” Adjustrite, 145 F.3d at 551. Ideally, the parties
would have finalized their negotiations and recorded their agreement in a document
formally exchanged and signed. They did not. The district court noted, “[t]his does
not mean the parties did not have a contract; they did–the Term Sheet.” Fairbrook
Leasing, 295 F. Supp.2d at 1072. While we agree the Term Sheet outlined the terms
of their agreement and expressed a clear intent by both parties to be bound by its
terms, and to continue to negotiate in good faith, it does not constitute a formal
contract. This factor weighs in favor of the defendants. This conclusion, however,
does not negate our holding that the Lessors and Mesaba intended to be bound by the
terms of the Term Sheet as we shall next discuss.

The fifth and final factor that requires our consideration is the context of the
negotiations between the Lessors and Mesaba. The Term Sheet recorded agreement
on the major terms of the lease: the identity of the lessor and lessee, the number of
planes, the rent for each, the configuration of each plane, the delivery schedule, and
the lease term. The parties performed the major terms of their agreement as they
continued to negotiate the minor terms. Mesaba clearly needed the Lessors’
performance to fulfill its obligations to its ten-year code-sharing agreement with
Northwest. “In signing the Term Sheet, Mesaba agreed to execute, or at the very least
to negotiate in good faith, long-term leases for each airplane. Mesaba’s refusal to
continue negotiating long-term leases may not involve subjective bad faith, but
nonetheless, constitutes a breach of its obligations under the Term Sheet.” Id. at
1073. We find the Term Sheet satisfies the requirements of a Type II agreement; at

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a minimum, Mesaba and the Lessors bound themselves to a framework that mandated
good faith negotiations over the remaining open terms of their agreement. We
conclude that the Term Sheet “represented a binding preliminary commitment and
obligated both sides to seek to conclude a final [agreement] upon the agreed terms by
negotiating in good faith to resolve such additional terms as are customary in such
agreements.” Teachers Ins. & Annuity Assoc. of Am., 670 F. Supp. at 499.

Finally, Mesaba argues the district court erred in concluding that the Lessors’
declaratory judgment claims are not time-barred. Its statute of limitations claim fails.
New York law requires that “an action upon a contractual obligation or liability” be
commenced within six years. N.Y. C.P.L.R. § 213(2) (2002). “[A] cause of action
for breach of contract accrues and the statute of limitations commences when the
contract is breached.” Raine v. RKO Gen., Inc., 138 F.3d 90, 93 (2d Cir. 1998). The
Lessors filed their declaratory judgment action on October 4, 2002. Mesaba asserts
that August 30, 1996, the extended deadline for the parties to conclude negotiations
and execute a formal contract, marked the beginning of the statute of limitations for
any contractual claim, and that any claim filed after August 30, 2002 is therefore
time-barred. Mesaba also argues that the written lease agreements, not the Term
Sheet, governed the transactions made in 2001.

We cannot accept Mesaba’s argument. “When an agreement expires by its
terms, if, without more, the parties continue to perform as theretofore, an implication
arises that they have mutually assented to a new contract containing the same
provisions as the old.” Martin v. Campanaro, 156 F.2d 127, 129 (2d Cir. 1946).
Mesaba was still receiving aircraft and paying rent in October 2001 pursuant to an
agreement made between the parties; this action commenced one year later, well
within the six-year statute of limitations. Furthermore, it is undisputed that in
October of 1996, the parties were performing their obligations under the Term Sheet,
and continuing to negotiate definitive documentation for another two years. We are

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persuaded that the district court properly concluded that the Lessors’ claims related
to the agreement were timely.

For the reasons cited above, we affirm the district court.

COLLOTON, Circuit Judge, dissenting.

I agree with the court’s articulation of New York law with respect to
preliminary agreements. A Type I agreement “arises when the parties agree on all the
points that require negotiation” and permits parties to demand performance of the
transaction, and a Type II agreement “establishes a framework for agreement, and
binds the parties to negotiate in good faith within that framework.” Ante at 5 (quoting
Fairbrook Leasing, Inc. v. Mesaba Aviation, Inc., 295 F. Supp. 2d 1063, 1065 (D.
Minn. 2003)). I respectfully dissent, however, because I do not believe the
undisputed facts demonstrate as a matter of law that Mesaba breached a Type II
agreement, and because even assuming the existence of a Type II agreement, it does
not give FLI a right to demand that Mesaba execute long-term airplane leases worth
millions of dollars. The court does not rely on FLI’s principal argument that the
“Term Sheet Proposal” is a binding Type I agreement as a matter of law, and I also
find that contention unpersuasive. In reaching my conclusion, I bear in mind that
“[o]rdinarily, preliminary manifestations of assent that require further negotiation and
further contracts do not create binding obligations,” Shann v. Dunk, 84 F.3d 73, 77
(2d Cir. 1996), and that a court should find a binding contractual obligation only in
“rare instances,” where a preliminary agreement “clearly manifests” such an intention.
Id.

A Type II agreement merely “binds the parties to negotiate in good faith,” and
I believe that determining whether such an agreement was breached in this case
requires resolution of factual disputes. Questions of good faith are “notoriously
inappropriate” for resolution at summary judgment, Krishna v. Colgate Palmolive

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Co., 7 F.3d 11, 16 (2d Cir. 1993), and here, I think there is enough evidence from
which a jury could infer Mesaba’s good faith throughout the negotiation process to
create a genuine issue of material fact. FLI’s former CEO acknowledged that the
parties “diligently set out to negotiate” and participated “to the best of their ability.”
(Appellant’s App. at 71, 73). That the parties reached agreement on short-term leases
while they negotiated further supports an inference that they were engaged in the
negotiation process with a good-faith intent to reach agreement on longer-term leases.
To be sure, FLI argues that Mesaba breached its obligations of good faith by insisting
on terms that were outside the Term Sheet and refusing to sign long-term leases until
its new demands were met. But I believe such factual disputes regarding Mesaba’s
good faith during the negotiation process are properly resolved by a jury in this case,
and not on summary judgment.

Furthermore, even if Mesaba has breached a Type II agreement, such an
agreement “does not commit parties to their ultimate contractual objective,” and “[a]
party to such a binding preliminary commitment has no right to demand performance
of the transaction.” Adjustrite Sys., Inc. v. GAB Bus. Servs., 145 F.3d 543, 548 (2d.
Cir. 1998) (internal quotations omitted). “Indeed, if a final contract is not agreed
upon, the parties may abandon the transaction as long as they have made a good faith
effort to close the deal and have not insisted on conditions that do not conform to the
preliminary writing.” Id. If the evidence demonstrates breach of a Type II
agreement, then FLI is not entitled to relief as though the parties ultimately had
reached the long-term airplane lease agreement toward which they had agreed to
negotiate. See also Goodstein Constr. Corp. v. City of New York, 604 N.E.2d 1356,
1360-61 (N.Y. 1992).

Although FLI devotes the great majority of its argument to defending the
district court’s conclusion that the Term Sheet constitutes a Type I agreement under
New York law, the court does not rely at all on this proposition. There are “two
distinct types” of preliminary contracts with binding force, Teachers Ins. and Annuity

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Ass’n of Am. v. Tribune Co., 670 F. Supp. 491, 498 (S.D.N.Y. 1987), and the court
implicitly rejects FLI’s position concerning a Type I agreement by concluding that
the Term Sheet constitutes a Type II preliminary binding commitment to negotiate in
good faith. While the multi-factor analysis prescribed by New York law is hardly
precise, I ultimately conclude that the four factors relevant to the analysis of this
preliminary agreement – the agreement’s language, the existence of open terms, the
parties’ partial performance, and whether this type of agreement usually is committed
to writing – weigh in favor of finding that the parties did not intend for the Term
Sheet to be binding as a Type I airplane lease agreement.

FLI contends that the parties, through the Term Sheet Proposal, agreed to a
multi-million dollar airplane lease contract. This undoubtedly is the sort of agreement
that usually is committed to writing, and it is undisputed that the Term Sheet lacks the
written detail and specificity typical of an airplane lease agreement.

The language of the “Term Sheet Proposal” itself also suggests that it amounts
to something less than a formal airplane lease agreement. The document is entitled
a “proposal,” see Adjustrite Systems, 145 F.3d at 549, not a “Term Sheet Contract,”
as FLI refers to the document throughout its brief. The proposal identifies its own
effect more narrowly than FLI urges. In the paragraph headed “EFFECT OF THIS
TERM SHEET,” the agreement reads: “By signing this Term Sheet, SAAI, FLI and
Mesaba evidence their agreement to negotiate, execute, and deliver definitive
documentation in substantially the form and substance of the 2/18/96 drafts of the
above-listed documents no later than April 15, 1996.” (Add. at 25). To my mind, the
relevant verbs – “to negotiate, execute, and deliver” – contemplate more than mere
scrivener’s work. The language suggests that there are terms yet to be settled
between the parties, and the contemplation of further negotiation tends to show that
the parties had not reached a complete agreement. A Type I agreement, by contrast,
occurs when “parties have reached complete agreement . . . on all the issues perceived
to require negotiation,” and “more elaborate formalization” is “not necessary,” but

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“merely considered desirable.” Tribune Co., 670 F. Supp. at 498; see also Adjustrite
Sys., Inc., 145 F.3d at 547-48 (applying Tribune Co. and acknowledging that it
articulated the “framework” for analyzing preliminary agreements under New York
law).

The parties’ subsequent performance similarly suggests that the Term Sheet
was a preliminary agreement that was not intended to be binding as an airplane lease
contract. Although the court quotes the district court’s conclusion that Mesaba
accepted delivery of 23 aircraft “using only the Term Sheet,” ante at 8, the parties in
fact executed separate short-term subleases covering those aircraft. These short-term
leases do not refer to the Term Sheet, and many of them say that they “constitute[] the
entire agreement between the parties.” The lease terms of the short-term leases do not
match the proposed terms in the Term Sheet, further suggesting that the parties were
not carrying out lease obligations pursuant to the Term Sheet.

That separate short-term leases were necessary is not surprising. The Term
Sheet itself is silent with respect to many issues that one would expect to find in a
lease agreement, including maintenance obligations, insurance, stipulated loss values,
and return conditions. While these matters may not be the most important terms in
an airplane lease agreement, I do not share the view that they are immaterial. These
open terms again suggest that the Term Sheet was not meant to be a binding lease
agreement, but rather a “framework for agreement” within which the parties were
bound to stay.

For these reasons, I would hold that the record fails to establish a binding Type
I agreement as a matter of law, and remand the case for further proceedings on the
question whether Mesaba breached a Type II agreement to negotiate in good faith
within the framework of the Term Sheet Proposal.
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