Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca8-04-02640/USCOURTS-ca8-04-02640-0/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 

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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

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The Honorable James M. Rosenbaum, United States Chief District Judge for

the District of Minnesota.

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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

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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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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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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,

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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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