In March 1996, Mesaba Aviation, Inc. (“Mesaba”), a regional airline, and subsidiaries of Swedish airplane manufacturer Saab AB 1 executed a document entitled, “Term Sheet Proposal for the Acquisition of Saab 340 Aircraft by Mesaba Aviation, Inc.” (the “Term Sheet”). The Term Sheet called for Mesaba to purchase thirty new 340BPlus aircraft from Saab and to sublease twenty used 340A aircraft from Fairbrook. The Term Sheet recited that it was “a summary of selected elements” of the final agreement; the parties agreed “to negotiate, execute, and deliver definitive documentation ... in substantially the form and substance of the 2/18/96 drafts ... no later than April 15, 1996.” Though no final agreement was ever signed, Fair-brook delivered a total of twenty-three used 340A aircraft to Mesaba. The parties executed short-term subleases on each aircraft, mistakenly expecting that a final agreement would eventually be signed.
In 2002, after Mesaba announced that it would return the leased aircraft, Fairbrook sought a declaratory judgment to enforce the long-term lease provisions of the Term Sheet. Applying New York law, we affirmed the district court’s grant of summary judgment in favor of Fairbrook.
Fairbrook Leasing, Inc. v. Mesaba Aviation, Inc.,
I. Background.
In addition to lengthy provisions regarding the financing and purchase of new Saab 340BPlus aircraft, the Term Sheet provided that Mesaba would sublease twenty used 340A aircraft from Fairbrook for $44,000 per month, subject to a $13,000 per month rebate if Mesaba met certain conditions such as avoiding default. The Term Sheet further provided that individual subleases would be signed for each aircraft and that “the term of each Sublease will be between 72 and 96 months ... with best efforts to obtain four (4), one (1) year extensions at the same Basic Rent.” The Term Sheet contained details about the configuration, delivery, and refurbishment of each aircraft and three conditions precedent, all of which were satisfied. It provided that New York law would govern its construction, validity, and performance. After signing the Term Sheet, Fairbrook acquired from third parties the right to sublease the twenty aircraft for the full term specified in the Term Sheet and spent up to $500,000 refurbishing each plane. Mesaba reported in its annual 1 0-K and quarterly 10-Q SEC filings that it had entered into an agreement to convert its fleet to Saab aircraft.
Fairbrook delivered twenty-three 340A aircraft to Mesaba between May 1996 and June 1998. The parties executed interim subleases for each and extended the Term Sheet’s deadline for the execution of a final sublease agreement. In late 1997, Saab announced it would stop manufacturing commercial aircraft. Worried about the impact on maintenance and repair costs, Mesaba insisted that Saab pay for certain maintenance costs on the 340A aircraft that were not included in the maintenance agreement covering the purchased 340BPlus aircraft. Mesaba’s negotiators admitted that Mesaba refused to sign long-term subleases on the 340A aircraft in part to gain “leverage” to obtain this concession. Mesaba also wanted to shorten the sublease term on some 340A aircraft to conform to Mesaba’s policy of not keeping aircraft in service longer than seventeen years. Negotiations toward a final contract ultimately ceased in December 1998.
Mesaba operated the twenty-three 340A aircraft through 2001, making timely lease payments of $31,000 per month. Three were returned by agreement in December 2001. 3 In July 2002, Mesaba gave notice that it would return the twenty remaining aircraft by October 2004. In October 2002, Mesaba stopped making lease payments on several aircraft. Fairbrook then commenced the declaratory judgment action to enforce the Term Sheet, taking the position that Mesaba was bound to the full extended twelve-year sublease term for each aircraft.
II. Fairbrook I.
In the declaratory judgment , action, the parties filed cross motions for summary judgment. The district court denied Mesaba’s motion and granted
partial
summary judgment in favor of Fairbrook, concluding that, even though the Term Sheet was a “preliminary agreement,” it was an
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enforceable contract because its “length, detail, formality, and completeness lend[] support to the finding that this document defines the parties’ obligations, and is not a mere invitation for them to continue to negotiate.”
Fairbrook Leasing, Inc. v. Mesaba Aviation, Inc.,
In June 2004, the parties entered into a Stipulation reciting that the “Order of December 8, 2003 is the extent of the declarations sought by [Fairbrook] at this time” and dismissing without prejudice Fair-brook’s claims for four-year sublease extensions. “Accordingly,” the Stipulation recited, “final judgment may be entered on the Court’s December 8, 2003 Order to allow [Mesaba] to appeal that order at this time.” The court entered an Order that the remaining claims were dismissed without prejudice and directed that “final judgment be entered.” 4 The Clerk entered a separate Judgment the next day containing no substantive terms.
Although Fairbrook filed the action seeking a declaratory judgment and referred to “declarations” in the Stipulation that manufactured a final order for appeal,
the “final” Order of December 8, 2008, contained no declaratory judgment. Cf. Azeez v. Fairman,
III. The New York Law of Preliminary Agreements.
In general, New York courts will not enforce “a mere agreement to
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agree, in which a material term is left
for
future negotiations.”
Joseph Martin, Jr., Delicatessen, Inc. v. Schumacher,
A federal court in New York attempted to synthesize these diverse principles in
Teachers Insurance & Annuity Association of America v. Tribune Co.,
Two years later, in
Arcadian Phosphates, Inc. v. Arcadian Corp.,
Tribune
and
Arcadian
were concerned with identifying when an agreement of the “second type” is an enforceable agreement to negotiate a contemplated final agreement. In some later cases, however, the
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federal courts in New York have declared there are two types of binding preliminary agreements, “Type I” and “Type II,” distinguished only by a fifth, highly subjective factor, the “context” of the negotiations.
See Adjustrite Sys., Inc. v. GAB Bus. Servs., Inc.,
145 F.Sd 543, 548-51 (2d Cir. 1998);
Shann v. Dunk,
After reviewing this array of decisions, we have serious doubt whether the so-called Type I binding preliminary agreement occupies a legitimate place in New York contract law. Much of our doubt is based on experience. When negotiating and drafting countless contracts in our prior legal careers, we rarely if ever encountered a “memorandum of understanding” or a “preliminary agreement” that required nothing more than the wordsmithing of a true scrivener to become a “final contract.” When such a document is encountered — and the expressly binding commitment letters in
Tribune
and contemporaneous cases
5
may be examples, even though the federal courts described them as “Type II” preliminary agreements — it should be enforced as a final, not as a preliminary, agreement. Any document less final, if binding under New York law, should be enforced as a preliminary agreement to negotiate in good faith in accordance with the two opinions of the New York Court of Appeals in
Goodstein,
6
unless, consistent with
Scheider,
there is “some objective method” of determining its open terms “independent of either party’s mere wish or desire,”
This case well illustrates our reluctance to acknowledge the Type I category of binding preliminary agreements. After the Term Sheet was signed, any lawyer worth her salt would not have signed off on a final contract committing client Mesaba to sublease twenty expensive airplanes for eight years, and granting the sublessor options for four more years, without seeking to negotiate whether there might be unforeseen circumstances (in addition to an act of God) that should relieve Mesaba of its longterm commitment. A premature decision by Saab to stop supporting the 340 series of aircraft is an example of a circumstance that might warrant bargaining.
IV. The District Court’s Rulings.
A. Type I or Type II Agreement.
In
Fairbrook I,
we reviewed a summary judgment opinion, interlocutory at the time it was issued, alternatively ruling that the Term Sheet was a Type I
and
a Type II binding preliminary agreement. In affirming, we expressly held that the “nego
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tiations surrounding the Term Sheet and the parties’ conduct lead us to conclude that [Fairbrook] and Mesaba entered into a Type II agreement, binding the parties to comply with the Term Sheet.”
In resolving the parties’ cross motions for summary judgment in this case, the district court after careful review construed our opinion in
Fairbrook I
as concluding that the Term Sheet was a Type II preliminary agreement. We agree. The court further concluded that basic principles of issue preclusion bar Fairbrook from relying on the district court’s alternative ruling that the Term Sheet was a Type I agreement because that ruling was not upheld on appeal. Again, we agree.
See
Restatement (Second) of Judgments § 27 cmt. o (1982);
Adjustrite,
B. Remedies for Breach of a Type II Agreement
Because we held in
Fair-brook I
that Mesaba breached a Type II preliminary agreement to negotiate the final sublease agreement in good faith, the district court next considered what remedies are available to Fairbrook for this type of breach. Invoking general principles governing the recovery of lost profits for breach of contract, Fairbrook argued that it was entitled to damages equal to all lost revenues over the life of the subleases contemplated in the Term Sheet. The district court rejected this contention, concluding that the issue was instead controlled by the decision of the New York Court of Appeals in
Goodstein II.
Agreeing with New York federal court decisions, the district court held that
Goodstein II
“prohibits the award of expectancy damages for the breach of a preliminary agreement.”
See Westerbeke Corp. v. Daihatsu Motor Co.,
On appeal, Fairbrook urges us
to
limit
Goodstein II
to its “extreme” facts and apply the normal contract principle that lost profits may be recovered from the breaching party if such damages were reasonably foreseeable and can be measured
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with reasonable certainty.
See Ashland Mgmt. Inc. v. Janien,
We are not as confident as the district court that
Goodstein II
should be read as categorically precluding benefit-of-the-bargain damages for all breaches of binding preliminary agreements to negotiate a final agreement in good faith. This is a difficult, largely unsettled question of remedies.
See
the conflicting opinions in
Venture Assocs. Corp. v. Zenith Data Sys. Corp.,
To put the question more concretely, consider
Teachers Insurance v. Butler,
a
pre-Goodstein II
ease in which a borrower reaped the benefits of the lender’s preliminary loan commitment for nineteen months and then, because interest rates had declined, refused to sign the final agreement, ostensibly because it contained an additional provision that was consistent with the lender’s and the lending industry’s practice. The court held that the lender was entitled to benefit-of-the-bargain damages — the difference between the interest rate specified in the commitment letter and the interest rate at the time of the breach.
Though we are uncertain whether the New York Court of Appeals would construe Goodstein II as categorically as did the district court and the cases on which that court relied, we have no difficulty affirming the district court’s decision that expectancy damages may not be recovered in this case. The Goodstein II court denied expectancy damages because
the City’s sole obligation ... was to negotiate in good faith.... To allow the profits that plaintiff might have made under the prospective [final agreement] as the damages for breach of the exclusive negotiating agreements would be basing damages ... on the prospective terms of a nonexistent contract which the City was fully at liberty to reject. It would, in effect, be transforming the agreement to negotiate for a contract into the contract itself.... [A] party’s alleged failure to negotiate in good faith is not a but-for cause of plaintiffs lost profits, since even with the best of faith *430 on both sides the deal might not have been closed----
Goodstein II,
Finally, Fairbrook argues that the district court erred in dismissing its claim for out-of-pocket expenses incurred in reliance on the binding preliminary agreement to negotiate. It is undisputed that reliance damages are recoverable under New York law.
See Westerbeke,
In the district court, Fairbrook’s complaint stated five claims for various categories of “rent” for Mesaba’s breach of the Term Sheet. Mesaba filed the first motion for summary judgment, arguing that Fair-brook may only recover reliance damages for Mesaba’s alleged breach of a Type II preliminary agreement, and that Fair-brook had conceded its reliance damages were de minimis. 8 One month later, Fair-brook filed its cross motion for summary judgment, arguing only that it was entitled to recover the benefit of its bargain — past and future unpaid gross sublease rent— whether the Term Sheet was a Type I or a Type II agreement. One month after that, Fairbrook filed its memorandum opposing Mesaba’s motion. On the next-to-last page of its brief, after forty pages arguing its claims for expectancy damages, Fairbrook asserted in a two-sentence footnote that, even if New York law did limit Fairbrook to its reliance damages, that claim “likely exceeds the amounts that [Fairbrook] seek[s] to recover for the benefit of [its] bargain.” Fairbrook then listed as examples of its reliance damages “headlease obligations for leased aircraft, ownership costs on equity aircraft, and refurbishment costs.”
In the Background section of its summary judgment Memorandum and Order, the district court noted that Fairbrook “admitted that under a Type II agreement, its out-of-pocket expenses would be
de minimis.”
The court did not discuss the issue further. Fairbrook never sought to amend its complaint to assert a claim for reliance damages; never sought additional time to present evidence on this potential summary judgment issue,
see
Fed.R.CivP. 56(f); and did not file a motion urging the district court to reconsider its summary dismissal of the issue. Nonetheless, Fair-brook argues for the first time on appeal that it never conceded its overall reliance expenditures were
de minimis,
only that its expenses related to the negotiation of
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the Term Sheet were
de minimis.
Thus, the reliance damages issue was not properly preserved in the district court, either factually or legally. We decline to exercise our limited discretion to consider an issue raised for the first time in an appeal taken after years of extensive litigation.
See Fjelsta v. Zogg Dermatology, PLC,
The judgment of the district court is affirmed.
Notes
. Fairbrook Leasing, Inc., Lambert Leasing, Inc., and Swedish Aircraft Holdings AB (collectively, "Fairbrook”).
. The HONORABLE MICHAEL L DAVIS, United States District Judge for the District of Minnesota.
. Fairbrook objected to the condition of the returned aircraft, demanded that Mesaba continue paying rent until they were upgraded, and claimed that Mesaba’s refusal to do so was a Term Sheet default that forfeited Mesaba’s right to receive the monthly rebate on the remaining twenty aircraft. Though the
Fair-brook I
majority opined that "all of the essential terms had been agreed upon,”
. Despite our frequent warnings, many lawyers use this dismissal-without-prejudice tactic to evade the statute limiting our appellate jurisdiction to the review of final orders. Regrettably, we often review such bogus final orders, as in
Fairbrook
I.
See generally Great Rivers Coop, of S.E. Iowa v. Farmland Indus., Inc.,
.
Teachers Ins. & Annuity Ass'n of Am. v. Ormesa Geothermal,
.
Goodstein,
. New York’s intermediate appellate courts have likewise read
Goodstein II
as categorically precluding expectancy damages for breach of a binding preliminary agreement to negotiate a final agreement in good faith.
See 180 Water St. Assocs.,
. Mesaba further submitted detailed evidence showing that it had paid Fairbrook a total of $53,537,000 in rent under the interim subleases for the 340A aircraft.