Burbach Broadcasting Company of Delaware v.  Elkins Radio Corporation; Cat Radio Incorporated

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
 BURBACH BROADCASTING COMPANY OF
DELAWARE,
Plaintiff-Appellant,
v. No. 00-2366 
ELKINS RADIO CORPORATION; CAT
RADIO INCORPORATED,
Defendants-Appellees. 
Appeal from the United States District Court
for the Northern District of West Virginia, at Elkins.
Robert Earl Maxwell, Senior District Judge.
(CA-98-111-2)
Argued: November 2, 2001
Decided: January 25, 2002
Before MICHAEL, KING, and GREGORY, Circuit Judges.
Vacated and remanded by published opinion. Judge Gregory wrote
the opinion, in which Judge Michael and Judge King joined.
COUNSEL
ARGUED: Joseph W. Conway, Sarver, Pennsylvania, for Appellant.
Jeffrey Stewart Zurbuch, BUSCH & TALBOTT, L.C., Elkins, West
Virginia, for Appellees. ON BRIEF: John E. Busch, BUSCH &
TALBOTT, L.C., Elkins, West Virginia, for Appellees.

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OPINION
GREGORY, Circuit Judge:
Burbach Broadcasting brought suit against Elkins Radio for breach
of contract and specific performance based on an alleged agreement
made between the parties for the purchase of Elkins’ radio station
assets. The agreement Burbach sought to enforce took the form of a
letter of intent, signed by the parties on October 2, 1998. The district
court granted judgment on the pleadings, finding that the letter of
intent was not binding because it was subject at all times to the nego-
tiation and execution of a mutually agreeable asset purchase agree-
ment, and no such agreement was ever reached by the parties.
Burbach contends that the letter of intent contained all the elements
of a complete, binding and enforceable contract and that the lack of
an asset purchase agreement does not affect Elkins’ obligation to sell
the assets. It argues that it could waive the provision calling for an
asset purchase agreement because the sole purpose of that provision
was to protect itself, due to limited information provided by Elkins.
In the alternative, Burbach contends that the letter of intent was, at a
minimum, a binding agreement obligating the parties to negotiate in
good faith towards a final contract. We find that the complaint ade-
quately states a claim on which relief can be granted, and because the
parties’ intent to be bound cannot be discerned on the face of the
pleadings alone, we vacate and remand to the district court for further
proceedings.
I.
In September of 1998, Elkins Radio, through its agent, submitted
a written offering document to Burbach Broadcasting regarding the
sale of Elkins’ radio station assets in West Virginia. In the offering,
Elkins proposed to sell the station assets for "$3.6 million on terms."
The offering stated that Elkins sought the sale due to retirement of its
owner.
After numerous discussions and meetings, the parties signed what
was termed a "Letter of Intent" on October 2, 1998. The five page let-
ter was written on Burbach letterhead. Burbach’s president, Nicholas
Galli, authorized the letter, which was addressed to Richard McGraw,
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president of Elkins Radio. It was faxed to Richard McGraw at approx-
imately 4:30 p.m. on October 2, 1998, and if Mr. McGraw had not
signed it by 5:00 p.m. that same day, it would have become null and
void.
The opening paragraph of the letter set forth the assets to be sold
by Elkins to Burbach. Following the opening paragraph, the letter
stated that because it was "based on certain limited information pro-
vided by the Sellers to Buyers," it was subject at all times to 1) buy-
ers’ due diligence review of the assets, 2) completion of disclosure
schedules for matters related to the assets, 3) "negotiation and execu-
tion of a mutually agreeable asset purchase agreement," and 4) FCC
approval for the assignment of the stations’ licenses from sellers to
buyers.
Next, the letter stated, "Sellers and Buyers, intending to be legally
bound, hereby agree to the contemplated transaction based on the fol-
lowing terms and conditions." The terms and conditions that followed
were set forth with detail.
To begin, the letter called for a purchase price of $1.5 million cash
at closing and a $1 million promissory note, which would bear inter-
est and amortize for a term of fifteen years. The letter stated that inter-
est would accrue at the "Prime Rate of National City Bank of
Pennsylvania as such may change from time to time plus one half per-
cent." There was to be an interest rate floor throughout the term and
an interest rate ceiling of 9.5% for the first five years, 10% for years
six through ten, and 10.5% for years eleven through fifteen. Repay-
ment was to be interest only for the first three years, level amortiza-
tion of principal over 144 months equal to $6,944.44, plus accrued
interest monthly for years four through twelve. Under the letter, buy-
ers had the right to prepay at any time. Though the letter set forth
these details regarding interest and repayment, it did not specify
whether the promissory note would be secured or unsecured.
The letter called for a consulting contract to Elkins’ president,
Richard McGraw, for one year after closing, at $3000 a month. Addi-
tionally, Mr. McGraw was to sign a three year non-competition cove-
nant. The letter also stated that Elkins was not conveying ownership
in its studio facility. Rather, Elkins was to lease Burbach its facilities
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for two years, at $1000 a month rental, and was to grant three one
year renewals after the expiration of the two year term. Other terms
specified that the parties would mutually agree to any public
announcements, and the date of closing was to be held on the latter
of January 4, 1999, or ten business days after Commission approval
of the FCC license transfer.
Regarding escrow, the letter stated that Burbach would place $5000
in a closing account held by its FCC counsel within five business days
of execution of the letter of intent and $70,000 upon execution of the
asset purchase agreement. Funds in escrow would be applied to the
purchase price at closing. If Burbach’s material breach caused closing
to fail, the letter specified that the funds in escrow would be paid to
Elkins, as liquidated damages and as Elkins’ exclusive remedy for
such breach. The escrow funds were to be paid to Burbach if closing
failed due to a material breach by Elkins. In addition, the letter stated
that "Buyers shall retain the right at Buyer’s [sic] option to proceed
with an action for specific performance."
The asset purchase agreement to be negotiated by the parties was
to 1) provide for, among other things, Burbach’s post closing obliga-
tions related to operations which were incurred in the ordinary course
of business and 2) reflect terms and conditions typical for the sale and
purchase of comparable radio broadcasting operations. Under the let-
ter, Burbach had the responsibility of drafting the asset purchase
agreement, subject to review by Elkins and Elkins’ counsel.
One of the last paragraphs in the letter stated: "Upon execution by
the parties herein and subject at all times to the terms herein, this Let-
ter of Intent shall be binding on and enforceable by the parties
hereto." The letter of intent was to expire by its own terms if an asset
purchase agreement was not executed by 5:00 p.m. on October 22,
1998, provided that a party was not in material breach or had not
unreasonably caused a delay.
On October 10, 1998, Elkins’ president wrote his broker about the
status of Elkins’ outstanding debt at that time, which amounted to
approximately $1.8 million. The letter was attached to Burbach’s
complaint. The debt included the broker’s possible five percent com-
mission on $2.5 million. Given the $1.8 million in combined debt and
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commission, Mr. McGraw observed that at least that amount would
be needed at closing, instead of the $1.5 million stated in the letter of
intent. Mr. McGraw indicated that the debt was higher than he had
previously calculated: "I just blew it by forgetting to add in that sec-
ond part of the CNB loan."
Burbach asserts that Elkins committed a material breach of the let-
ter of intent by demanding an additional $300,000 or $400,000 be
added to the cash paid at closing. Burbach argues that this breach
made it factually and legally impossible for it to complete a due dili-
gence review of the assets and to negotiate and execute a mutually
agreeable asset purchase agreement.
Burbach filed its complaint against Elkins on November 23, 1998,
alleging breach of contract based on the letter of intent. Jurisdiction
was based on diversity of citizenship—Burbach is a Delaware corpo-
ration with its principal place of business in Pennsylvania, and Elkins
is a West Virginia corporation with its principal place of business in
West Virginia. The letter of intent and other exhibits were attached
to the complaint as exhibits. In its responsive pleading, Elkins
asserted that Burbach failed to state a claim upon which relief can be
granted, and moved to dismiss the complaint. After unsuccessful
attempts at mediation, the district court granted Elkins’ motion to dis-
miss, or in the alternative, judgment on the pleadings. The court dis-
missed the complaint with prejudice, concluding that the letter of
intent was not enforceable as a purchase agreement and that it expired
by its own terms when the parties failed to negotiate and execute a
mutually agreeable asset purchase agreement. Burbach appeals the
decision granting judgment on the pleadings.
II.
The district court granted Elkins’ motion to dismiss for failure to
state a claim, or in the alternative, judgment on the pleadings. Rule
12(h)(2) provides that the defense of failure to state a claim upon
which relief can be granted as set forth in Rule 12(b)(6) may be raised
by motion for judgment on the pleadings. Because Elkins’ answer had
been filed, the pleadings were closed at the time of the motion. Thus,
we construe the motion as one for judgment on the pleadings. How-
ever, the distinction is one without a difference, as we review the dis-
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trict court’s decision to grant judgment on the pleadings de novo,
applying the same standard for Rule 12(c) motions as for motions
made pursuant to Rule 12(b)(6). Edwards v. City of Goldsboro, 178
F.3d 231, 243 (4th Cir. 1999); Pacific Ins. Co. v. American Nat’l Fire
Ins. Co., 148 F.3d 396, 405 (4th Cir. 1998). Accordingly, we assume
the facts alleged in the complaint are true and draw all reasonable fac-
tual inferences in Burbach’s favor. Edwards, 178 F.3d at 243.
III.
The contested issue in this case involves the nature of the obliga-
tions, if any, that arose out of the letter of intent signed by the parties
on October 2, 1998. The district court found that the letter of intent
was not an enforceable contract. Burbach contends 1) the letter con-
tained all of the essential terms necessary for a completed contract,
and as such was binding on the parties, and 2) in the alternative,
assuming the letter was not a completed contract, it was at a minimum
a binding agreement to negotiate in good faith towards a final con-
tract.
Burbach cannot prevail on either theory if the parties did not intend
to be bound by the letter of intent. It is fundamental to contract law
that mere participation in negotiations does not create a binding obli-
gation, even if agreement is reached on all terms. More is needed than
agreement on each detail—the parties must have intended to enter
into a binding agreement. The district court ruled, on Elkins’ motion
for judgment on the pleadings, that the letter was not intended to be
binding on the parties. We find, due to ambiguous language in the let-
ter, that intent cannot be discerned on the face of this letter of intent.
When intent is not clear from the face of a document, whether parties
negotiating a contract intended to be bound by a writing or whether
they did not intend to be bound until a formal agreement was prepared
and signed by them must be determined from the facts and circum-
stances in each case. For this reason, and because the district court
considered some matters outside the pleadings, we remand to the dis-
trict court for determination, based on a full record, of whether the let-
ter falls into one of the two types of preliminary agreements that can
be binding on the parties.
Letters of intent have led to much misunderstanding, litigation, and
commercial chaos. 1 Corbin on Contracts § 1.16 (1993). Courts have
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expressed reservation concerning the binding nature of "letters of
intent" because traditionally, the purpose and function of a prelimi-
nary letter of intent has been to merely provide the initial framework
from which the parties might later negotiate a final binding agree-
ment. See A/S Apothekernes Laboratorium v. I.M.C. Chemical Group,
Inc., 873 F.2d 155, 158 (7th Cir. 1989). Calling a document a "letter
of intent" implies, unless circumstances suggest otherwise, that the
parties intended it to be a nonbinding expression in contemplation of
a future contract. As is commonly the case with contract disputes,
prime significance attaches to the intentions of the parties and to their
manifestations of intent. Teachers Insurance and Annuity Assoc. of
America v. Tribune Co., 670 F. Supp. 491, 497 (S.D.N.Y. 1987).
Labels such as "letter of intent" or "commitment letter" are not neces-
sarily controlling, although they maybe helpful indicators of the par-
ties’ intentions. Id.
Indeed, it is difficult to generalize about the legal effect of prelimi-
nary agreements. They can cover a broad scope of agreements, rang-
ing in "innumerable forms and variations" from letters of intent which
presuppose that no binding obligations will be placed upon the parties
until final contract documents have been signed, to firm binding com-
mitments which, notwithstanding a need for more detailed documen-
tation of agreement, can bind the parties to adhere in good faith to the
deal that has been agreed. Teachers, 670 F. Supp. at 497.
Some preliminary agreements are simply not capable of creating
binding obligations. When terms are so vague and indefinite that there
is no basis or standard for deciding whether the agreement has been
kept or broken, or to fashion a remedy, and no means by which such
terms may be made certain, then there is no enforceable contract. See
Ridgeway Coal Co. v. FMC Corp., 616 F. Supp. 404, 406 (S.D.W.
Va. 1985). In preliminary negotiations, when not even the basic terms
have been agreed upon, courts will not find enforceable binding con-
tracts. This type of unspecific agreement to agree at some time in the
future is nothing more than a part of the negotiation process itself.
While bare-boned "agreements to agree" are not binding, courts
have recognized two kinds of preliminary agreements that are binding
and enforceable. Judge Leval, in his well-reasoned and often cited
decision, Teachers Insurance and Annuity Assoc. of America v. Tri-
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bune Co., 670 F. Supp. 491 (S.D.N.Y. 1987), recognized the impor-
tance of enforcing and preserving agreements that were intended as
binding, despite a need for further documentation or further negotia-
tion. Id. at 498. A Type I agreement, the "fully binding preliminary
agreement," occurs when parties have reached a complete agreement
(including the agreement to be bound) on all issues perceived to
require negotiation. Id. Such an agreement is preliminary only in form
—only in the sense that the parties desire a more elaborate formaliza-
tion of the agreement. Id. "The second stage is not necessary; it is
merely considered desirable." Id.
Judge Leval referred to the second type of binding preliminary
agreement as a "binding preliminary commitment." Id. The binding
obligations attached to a Type II preliminary agreement are different
from those that arise out of the first type of agreement. Type I agree-
ments bind parties to their ultimate contractual objective in recogni-
tion that a contract was reached, despite the anticipation of further
formalities. Id. Type II agreements do not commit the parties to their
ultimate contractual objective. Rather, they commit the parties to
negotiate the open issues in good faith in an attempt to reach the con-
tractual objective within the agreed framework.1 Id. Under this duty
to negotiate in good faith, a party is barred from renouncing the deal,
abandoning the negotiations, or insisting on conditions that do not
conform to the preliminary agreement.2 Id.
1If a Type I preliminary agreement is reached, a party may demand
performance of the transaction even if no further steps have been taken
after the preliminary agreement. For Type II agreements, a party may not
demand performance. However, that party may demand that his counter-
party negotiate the open terms in good faith toward a final contract incor-
porating the agreed terms. Teachers, 670 F. Supp. at 498.
2This obligation does not guarantee that the final contract will be con-
cluded if both parties comport with their obligation, because good faith
differences in the negotiation of the open issues may prevent the parties
from reaching a final contract. It is also possible that the parties will lose
interest due to changed circumstances and will mutually abandon the
negotiation. Teachers, 670 F. Supp. at 498.
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A.
Type I fully binding preliminary agreements are not unlike oral
agreements that are meant to be formalized at a later date.3 West Vir-
ginia law recognizes that where the parties have fully agreed upon all
of the matters about which they are negotiating, and have fixed their
reciprocal obligations and rights so that the same cannot thereafter be
changed without mutual consent, there is a valid and binding contract,
notwithstanding the parties may agree that these agreements and
understandings shall be subsequently reduced to writing and signed
by the parties. Brown v. Western Maryland Ry. Co., 114 S.E. 457, 460
(W. Va. 1922).
The Second Circuit has provided a useful framework to aid courts
in determining whether a preliminary agreement is a Type I fully
binding preliminary agreement. Among the circumstances which may
be helpful in determining whether this type of agreement has been
made are 1) whether there has been an express reservation of the right
not to be bound in the absence of a writing, 2) whether there has been
partial performance of the contract, 3) whether all of the terms of the
alleged contract have been agreed upon, and 4) whether the agree-
ment at issue is the type of contract that is usually committed to writ-
ing. Adjustrite Systems, Inc. v. GAB Business Services, Inc., 145 F.3d
543, 549 (2d Cir. 1998); see also Restatement (Second) of Contracts
§ 27 cmt. c (1981).
B.
Judge Leval modified the test for Type I agreements slightly when
3Parties who plan to make a final written instrument as the expression
of their contract necessarily discuss the proposed terms of the contract
before they enter into it and often, before the final writing is made, agree
upon all the terms which they plan to incorporate therein. This they may
do orally or by exchange of several writings. It is possible thus to make
a contract the terms of which include an obligation to execute subse-
quently a final writing which shall contain certain provisions. If parties
have definitely agreed that they will do so, and that the final writing shall
contain these provisions and no others, they have concluded the contract.
Restatement (Second) of Contracts § 27 cmt. a (1981).
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he formulated his well known five-part test for determining whether
parties intended to form a Type II binding preliminary agreement.
The five factors set forth by Judge Leval are 1) the language of the
agreement, 2) the existence of open terms, 3) whether there has been
partial performance, 4) the context of negotiations, and 5) the custom
of such transactions. Teachers, 670 F. Supp. at 499-503. The first fac-
tor, the language of the agreement, is arguably the most important
factor in a court’s analysis. However, when the language of an alleged
agreement is susceptible to more than one interpretation, as here, a
court should focus on the other four factors, which necessarily
involves a review of the facts and circumstances surrounding the agree-
ment.4
The district court, in relying on the five Teachers factors, without
specifically stating so, impliedly rejected Burbach’s contention that
the letter of intent represented a completed contract that was to be for-
malized at a later time. In other words, the district court determined
that the letter of intent was not a Type I fully binding preliminary agree-
ment.5
West Virginia law is silent as to whether it recognizes the second
type of binding agreement, but following the modern trend in contract
law, and many state courts that have recognized the pragmatism and
commercial necessity of recognizing such agreements, we suspect
that it would.6 We note that West Virginia recognizes that "in every
4In many instances, disputed issues of material fact will preclude sum-
mary judgment in favor of either party on this issue. See generally
Arnold Palmer Golf Co. v. Fuqua Industries, Inc., 541 F.2d 584, 588 (6th
Cir. 1976).
5We make no determination on whether the letter of intent did or did
not constitute a Type I fully binding preliminary agreement, but leave it
to the district court on remand to consider the matter on the facts in the
record.
6A Type II preliminary agreement prevents parties from arbitrarily
abandoning negotiations, and therefore provides an assurance that a deal
will falter only over a genuine disagreement and not due to a dispute
over the "major" terms of the agreement, which have already been agreed
to by the parties.
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contract there exists an implied covenant of good faith and fair deal-
ing." Harless v. First National Bank in Fairmont, 246 S.E.2d 270,
274 (W. Va. 1978). Furthermore, in Ridgeway, supra, the district
court for the Southern District of West Virginia, in a contract dispute
first filed in West Virginia Circuit Court, recognized that an agree-
ment with terms left open can be binding on the parties if they "have
agreed to basic terms, leaving only nonessential elements subject to
negotiations." Id. This is precisely what Burbach argues on appeal—
that with the letter of intent, Elkins, at a minimum, agreed to negotiate
in good faith towards filling in the open terms, i.e., towards a mutu-
ally acceptable asset purchase agreement. The district court wisely
recognized the usefulness of the five Teachers factors in determining
the parties’ intent to be bound, but because this determination neces-
sarily involves matters outside the pleadings, such as the custom of
such transactions, the district court should consider the Teachers fac-
tors on summary judgment, if such a motion is filed.7 A trial on the
merits may be warranted if disputed issues of fact remain. We decline
to make an immediate determination of the issue because the record
we have before us does not clearly indicate whether summary judg-
ment should be granted or denied.
Without such an agreement, parties may spend enormous sums negoti-
ating every detail of contract wording without knowing whether they
have an agreement, and if so, on what terms. Teachers, 670 F. Supp. at
499. Because contract law aims to "gratify, not defeat expectations," the
modern trend sees courts enforcing agreements that were intended to be
binding, even if some terms were left open for further negotiation. Id. at
498.
7On remand, we encourage the district court to ensure that West Vir-
ginia recognizes Type II agreements and does not follow Kentucky’s "all
or nothing" approach. Though many jurisdictions recognize agreements
to negotiate in good faith and have ordered specific performance or
imposed a measure of damages for a party’s failure to so negotiate, Ken-
tucky takes the traditional approach—either the agreement is enforceable
as a binding contract to consummate the transaction or it is unenforce-
able as something less. Cinelli v. Ward, 997 S.W.2d 474, 478 (Ky. 1999).
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IV.
For the foregoing reasons, the judgment of the district court is
vacated and remanded for further proceedings.
VACATED AND REMANDED
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