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Norfolk Southern Railway Co. v. Pittsburgh & West Virginia Railroad

United States District Court, W.D. Pennsylvania

June 19, 2014

NORFOLK SOUTHERN RAILWAY COMPANY AND WHEELING & LAKE ERIE RAILWAY COMPANY Plaintiffs,
v.
PITTSBURGH & WEST VIRGINIA RAILROAD AND POWER REIT, Defendants.

MEMORANDUM OPINION AND ORDER OF COURT

TERRENCE F. McVERRY, District Judge.

Pending before the Court is a MOTION FOR SUMMARY JUDGMENT (ECF No. 117) filed by Defendant Power REIT with brief (ECF No. 112) in support. Plaintiffs Norfolk Southern Railway Company ("Norfolk Southern") and Wheeling & Lake Erie Railway Company ("Wheeling & Lake Erie") filed a brief (ECF No. 127) in opposition; Power REIT filed a reply brief (ECF No. 149). The factual record with regard to this motion has been thoroughly developed via the submission of Power REIT's Concise Statement of Material Facts ("CSMF") (ECF No. 111) with an appendix (ECF No. 113) and exhibits (ECF No. 114) filed in support; Plaintiffs' Responsive CSMF (ECF No. 128) with an appendix and exhibits in support (ECF No. 129); and Power REIT's Responsive CSMF (ECF No. 150) and supplemental appendix (ECF No. 151). The Court heard oral argument on January 15, 2014, and the transcript (ECF No. 170) has been filed of record.

There are also three other motions pending in this matter:

(1) a MOTION TO JOIN POWER REIT AS A NECESSARY PARTY TO PITTSBURGH & WEST VIRGINIA RAILROAD'S SECOND SUPPLEMENT TO COUNTERCLAIMS (ECF No. 117) filed by Plaintiffs with brief (ECF Nos. 118) in support;
(2) a MOTION TO DEEM ADMITTED CERTAIN PARAGRAPHS OF PLAINTIFFS' ADDITIONAL UNDISPUTED MATERIAL FACTS (ECF No. 156) filed by Plaintiffs with brief in support (ECF No. 157); and
(3) a MOTION FOR LEAVE OF COURT TO FILE AMENDMENT TO SECOND SUPPLEMENT TO COMPLAINT AMENDING THE PRAYER FOR RELIEF (ECF No. 162) filed by Plaintiffs with brief (ECF Nos. 163) in support.

Power REIT filed a response in opposition (ECF Nos. 123, 156, 164) to each motion; Plaintiffs filed reply briefs (ECF Nos. 136, 165) with respect to the Rule 19 and Rule 15 motions.

The issues have been fully briefed and well-argued on behalf of the parties. Accordingly, the motions are ripe for disposition.

I. Background

A. Factual Background

The following background is taken from the Court's independent review of the motions, the filings in support and opposition thereto, and the record as a whole.[1]

1. The "Demised Property"

The factual underpinnings of this action date back to 1962 when The Pittsburgh & West Virginia Railway Company, the predecessor of Pittsburgh & West Virginia Railroad ("PWV"), entered into a lease agreement (the "Lease") with Norfolk & Western Railway Company ("Norfolk & Western"), a predecessor of Norfolk Southern, to convey certain properties that it owned and operated (the "Demised Property").[2] See Lease at 1, Ex. 1 to Compl., ECF No. 1-2 (" Section 1. PROPERTY DEMISED."); see also id. at 2 (" Section 2. PROPERTY NOT DEMISED."). The Demised Property consists of a 112-mile portion of main line railroad (the "Rail Line") and approximately twenty miles of branch rail lines that run from Western Pennsylvania through West Virginia and into Ohio. See id. at 24-26 (describing the properties). Once the Lease commenced on October 16, 1964, The Pittsburgh & West Virginia Railway Company ceased active railroad operations which Norfolk & Western assumed along with all right, title, and interest to the Demised Property.

In 1990, Norfolk & Western and Wheeling & Lake Erie entered into a sublease (the "Sublease") through which the latter became the principal operator of the Rail Line and assumed all rights, title and interest in the Demised Property covered under the Lease. Norfolk Southern, which operates 20, 000 route miles in twenty-two states and Washington D.C., ultimately became the successor-in-interest to all rights and obligations of Norfolk & Western.

2. The Lease

The term of the Lease is 99-years, renewable in perpetuity at the option of Lessee absent a default. See id. at 3-4 (" Section 3. TERM OF LEASE."). The same terms and conditions, including the economic provisions of the Lease, remain in effect with each renewal.

Rent under the Lease consists of a cash payment fixed at $915, 000 per year (Section 4(a) rent) as well as additional non-cash items attributable to the real properties (Section 4(b) rent). See id. at 4-6 (" Section 4. RENT."). Those additional items characterized as "rent" include (1) sums equal to the deduction(s) ( e.g., for deprecation or amortization with respect to the Demised Property) allowed to Lessor under the then-effective Internal Revenue Code; and (2) other expenses of the Lessor that it is lawfully required to incur in performing under the Lease except those expenses incurred for the benefit of or reasonably allocated to its shareholders.

The Lease further provides that the Lessee may (subject to some restrictions) sell, lease, or otherwise dispose of that part of the Demised Property which it deems not necessary or not useful to its operation. See id. at 11-12 (" Section 9. DISPOSITION OF PROPERTY OF LESSOR."). Section 9 requires that the Lessor must execute and deliver the instruments necessary to effectuate those transactions. The proceeds of any disposition of the Demised Property by the Lessee must be paid to the Lessor.

Section 16 of the Lease governs the payment of the sums due as additional rent or the amounts owed from any disposition.[3] See id. at 17-19 (" Section 16. MISCELLANEOUS."). Those totals or any part thereof may, at the option of the Lessee, be paid either in cash or by crediting Lessor with the same as indebtedness in an account of transaction ( i.e., the so-called "Settlement Account") under the Lease. The balance of the Settlement Account is due and payable to the Lessor only upon the termination of the Lease.[4]

The Lease will terminate upon the proper expiration of its terms or at the Lessor's election upon a default by the Lessee. See id. at 14-15 (" Section 11. TERMINATION OF LEASE."). A default will occur when the Lessee fails to pay any part of the rent due under Section 4(a) after having been given thirty days' written notice or fails to perform other covenants, agreements, and/or obligations after having been given sixty days' written notice. See id. at 15-16 (" Section 12 . DEFAULT BY LESSEE."). The commencement of any proceedings for relief under any sort of bankruptcy or insolvency law will also constitute a default.

Should the Lessor opt for termination upon default, the Lease provides that the Lessor becomes entitled to the Demised Property as well as all revenues, rents, issues, income and profits therefrom and that the Lessee ceases to have any estate, right, title, or interest in the Demised Property. The Lease further requires that the Lessee turn over to Lessor property and cash sufficient to operate the Demised Property for one year. Additionally, the Lessor is entitled to payment of all damages suffered "by reason of or arising from the breach or default of Lessee or termination of th[e] Lease, with interest thereon at 6% per annum, plus reasonable attorney's fees, costs and expenses of Lessor." Id. at 16.

Nevertheless, as long as the Lessee is not in default, the Lessor is subject to several restrictions under the Lease. See id. at 8-11 (" Section 8. COVENANTS OF LESSOR."). For example, Section 8(a)(2) prohibits the Lessor from issuing any stock (or options to purchase such stock) without the prior written consent of the Lessee, which must not be unreasonably withheld. Section 8 contains other covenants which require the Lessor to take all action within its control necessary to preserve its corporate existence (Section 8(a)(1)) and which restrict its ability to incur debt (Section 8(a)(5)). See id. at 8-9. Similarly, Section 8(b)(1) prevents the Lessor from declaring any dividend on its common stock in an amount exceeding (1) the non-demised property, the proceeds thereof and income therefrom; and (2) the annual rent of $915, 000 due pursuant to Section 4(a).

On several occasions during the early years of the Lease, PWV obtained the consent of Norfolk & Western for certain actions required by these covenants, such as when it borrowed $125, 000 to pay the expenses of reorganization from a corporation into a trust.[5] See Def.'s Responsive CSMF at 8-9, ΒΆ 86-90, ECF No. 150. PWV likewise obtained the consent of Norfolk & Western in the late-1960's to issue shares and assume up to $3, 300, 000 in obligations in connection with the acquisition of shopping centers.

More recently, PWV has attempted to loosen some of the restrictions in the Lease based on its purported inability to protect or enhance shareholder value in light of the contractual limits coupled with inflationary increases in annual expenses and the promulgation of securities regulations. In September 2006, Howard Capito (then a member of PWV's Board of Trustees) and Herbert E. Jones, III (then-PWV's President and a member of its Board) traveled to Norfolk, Virginia to meet with representatives of Norfolk Southern regarding its proposals. Roughly one month later, Norfolk Southern's Director of Strategic Planning sent Capito a letter to inform him that it did not desire to make any changes to the Lease.

3. PWV's Change in Management

From the commencement of the Lease until 1995, the administrative functions of PWV were handled through International Mining, a company affiliated with Lewis Harder, one time Chairman of the Board of Trustees for PWV. In 1995, PWV moved all administrative functions to the office of Port Amherst in Charleston, West Virginia. Port Amherst was the family business of Herbert E. Jones Jr. ("Mr. Jones Jr."), Charles Jones, and Herbert Jones, III ("Mr. Jones III) all of whom served as Trustees at various times since the inception of the Lease. PWV moved its principal place of business to New York in 2011 after David Lesser gained control of the company.

In 2009, Lesser and his affiliated entities began to purchase a sizeable amount of PWV stock. Lesser thereafter expressed his interest to PWV executives about becoming a member of its Board, and he ultimately became a Trustee sometime in 2009.[6]

On July 8, 2010, the Chairman of PWV's Board, Mr. Jones, Jr., passed away. Over the course of his stewardship, the parties and their predecessor entities performed their rights and responsibility in apparent harmony. But this once-amicable relationship apparently turned adversarial soon after new leadership emerged at PWV and corresponding changes in direction occurred at the company.

Two weeks later, on July 22, 2010, Lesser sent Mr. Jones III an e-mail in which he outlined his vision for PWV's future and expressed his desire to serve as the new Chairperson.[7] Moreover, Lesser set forth what he believed to be "three clear paths to deal with the restrictions contained in the [L]ease that need to be explored to determine the best strategy:" (1) PWV could sell its property subject to the Lease; (2) PWV could restructure its operation such that it would become a wholly-owned-subsidiary; or (3) PWV could renegotiate the terms of the Lease. See Pls.' App'x. Ex. 41 at D019851, ECF No. 129-41 at 2. Lesser later drafted and circulated among the Trustees a more formal proposed written consent for the issuance of additional stock shares to raise capital for the purpose of restructuring.

Mr. Jones III disagreed with Lesser's intention to restructure PWV, but the Trustees approved the plan nevertheless. On November 30, 2010, Mr. Jones III resigned as Chairman of the Board of Trustees. Later that year, the Board of Trustees selected Lesser to succeed Jones and serve as its Chairman.

4. The Rights Offering

Shortly after his election as Chairman, Lesser prepared a document labeled "Board Discussion Outline December 2010." See Pls.' App'x Ex. 12, ECF No. 129-12. In his Outline, Lesser identified the "Current Status" of PWV in which he noted that it has no debt and two assets: the "Railroad pursuant to [L]ease ($915, 000);" and (2) the "Public company shell'" with an annual cost of $165, 000 and which required restructuring based on the restrictions of the Lease. Id. at D032741, ECF 129-12 at 3. The Outline also set forth several potential areas for growth opportunities, such as "us[ing] the shell to finance additional special purpose' assets." Id. at D032743, ECF No. 120-12 at 5. This section further indicated that Lesser has a focus on alternative energy assets and that the REIT structure is well-suited to pursue that avenue. Several other pages of the December 2010 Outline are labeled "Power REIT." Lesser labeled the final page "Next Steps" which included several alternatives for evaluation by the Trustees.

In January 2011, Lesser provided to PWV's Board a presentation based in part on his December 2010 Outline.[8] Pls.' App'x Ex. 6, ECF No. 129-6. Arun Mittal, a business consultant who became vice president, treasurer and secretary of PWV in March 2011, assisted Lesser in the preparation of the presentation. Much like the December 2010 Outline, this presentation included pages which described the public company "shell, " the REIT structure, various options to raise capital, and the proposed reorganization whereby PWV would become a subsidiary of another entity, purportedly without affecting the existing Lessor-Lessee relationship. Other pages indicated that PWV need to "[f]inalize plans for restructuring based on lease restrictions" and "[h]ire REIT taxation expert." Id. at Pls.' 0032403, ECF No. 129-6 at 19.

On January 5, 2011, Lesser sent an e-mail to Parsons regarding the January 2011 presentation, attaching a proposed Board resolution which approved his plan. More specifically, the resolution provided, in relevant part, as follows:

WHEREAS, all Trustees of PW have received the PW Board Discussion Packet dated 1/3/2011 (the "Discussion Packet") and have had a chance to review the information with David Lesser.
RESOLVED, that the Board hereby votes to proceed with the plan as generally outlined in the Discussion Packet. Specifically, the Board authorizes proceeding with (i) the Rights Offer to shareholders; (ii) retaining Morrison Cohen as general corporate counsel; (iii) formation of an Executive Committee consisting of Virgil Wenger, Patrick Haynes and David Lesser.

Pls.' App'x Ex. 45 at Pls.' 0005826, ECF No. 129-45 at 3. Lesser also requested that Parsons, as Chairman of Sublessee Wheeling & Lake Erie, provide the written consent for the issuance of shares required by Section 8(a) of the Lease. As of January 12, 2011, Parsons had not responded.

Lesser sent Parsons a follow-up e-mail that day in which he acknowledged that "a majority of the Board has already signed the Resolution" and sought the approval of Wheeling & Lake Erie once again. Pls.' App'x Ex. 46 at Pls.' 005824, ECF No. 129-46 at 2. Wheeling & Lake Erie never issued its consent after which Lesser approached Norfolk Southern to obtain the requisite approval. In late January 2011, Lesser began speaking with Randy S. Noe, then-General Attorney at Norfolk Southern, about obtaining the Lessee's consent to issue stock. Through a series of e-mail exchanges over the next two weeks, Lesser demanded immediate action and Noe continued to press for more information. See Pls.' App'x Ex. 13, ECF No. 129-13; Def.'s App'x Ex. 10, ECF No. 114-13.

On February 3, 2011, Noe notified Lesser that Norfolk Southern "would like [him] to offer more details about [his] plan and what [he] intend[ed] to do with the additional working capital so we can get a better understanding how it might affect Norfolk Southern's interest in the assets leased from PVW." Pls.' App'x Ex. 13 at D019869, ECF No. 129-13 at 4. Minutes later, Lesser responded: "I fail to understand how the issuance of equity will impair the asset. I am not sure what additional details you feel you need but we are certainly interested in getting you what we can to get this done. Having said that, I am not sure what more we can give or what you are looking for." Id. at D019868, ECF No. 129-13 at 3. The following day, Noe again requested more information after he held a telephone call with Mittal. As Noe wrote, "I understood [Mittal] to say that PWV plans to raise capital to hire consultants, lawyers, and other professionals to explore ways to broaden PWV's business. However, he did not tell me that PWV has any particular business plan in mind. It is this degree of uncertainty along with the size of the offering that warrants further investigation." Id.

Lesser responded on February 7, 2011, sending Noe a copy of the Form S-3 Registration Statement that had been prepared ostensibly in connection with the Rights Offering, but which was not yet filed with the Securities and Exchange Commission ("SEC"). Id. at D019871, ECF No. 129-13 at 6. In his e-mail, Lesser also represented that "[t]his document [the S-3] contains all available information on PWV's plans at this point" and that it "remain[ed] interested in providing everything possible in an effort to secure the consent." Id. Relevant here, the S-3 sent to Noe contained a section entitled "Use of Proceeds, " which read, in part, as follows:

The purpose of the rights offering is to raise equity capital in a cost-effective manner that gives all of our stockholders the opportunity to participate. The proceeds of the rights offering will be used to provide working capital for the initial steps of this broadening of PW's business. Specifically, PW will use the proceeds to: hire employees, advisors and/or consultants that will assist it with developing and implementing a new, broader business plan; to undertake diligence on potential business or investment opportunities consistent with its status as a REIT; and for other purposes related to our intended business-broadening, and, to the extent any proceeds remain after the foregoing, for general corporate purposes (including expenses related to our status as a public company).

Pls.' App'x Ex. 10 at Pls.' 0000562, ECF No. 129-10 at 42.[9] The S-3 filing does not specifically mention the proposed corporate reorganization set forth in the December Outline and January Presentation.

One week after the draft S-3 was sent to Noe, Norfolk Southern provided its written consent. In its February 14, 2011 correspondence to Lesser, Norfolk Southern noted that PWV had solicited its consent "to the transaction (the "Transaction") contemplated by that certain draft Form S-3 Registration Statement provided to [it] by [PWV], which [PWV] represented to be in the form to be filed with the [SEC]." Pls.' App'x Ex. 13 at D019872, ECF No. 129-13 at 7. The letter continued: "Pursuant to Section 8(a)(2) of the Lease and subject to the trust and correctness of the foregoing representation, [Norfolk Southern] hereby consents to, and only to, the Transaction as set forth in the Registration Statement, including but not limited to the use of proceeds described therein...." Id. Three of the five members of PWV's Board of Trustees authorized the rights offering via a resolution that Lesser first circulated on February 3, 2011.

On February 15, 2011, PWV filed its Form S-3 Registration Statement with the SEC. PWV completed its rights offering on March 16, 2011, raising $1, 019, 000 in gross proceeds in connection with the sale of additional stock to existing shareholders-primarily to Hudson Bay Partners, LP ("Hudson Bay") of which Lesser is the President. PWV used some of this working capital to retain the services of Caravan Partners (a consulting firm owned by Mittal), four law firms, and an accounting firm.

5. The Formation of Power REIT

Power REIT was initially formed as a real estate investment trust on August 26, 2011 under the laws of Maryland. Three days later, on August 29, 2011, Power REIT PA, LLC, a Pennsylvania limited liability company, was formed as a wholly-owned subsidiary of Power REIT for the sole purpose of effecting PWV's corporate reorganization.

On August 31, 2011, PWV filed with the SEC a Preliminary Registration Statement on Form S-4 that listed both itself and Power REIT as the Registrants. The Preliminary S-4 included a prospectus for the shareholders of PWV, stating that PWV desired "to create shareholder value by expanding its business plan...." Pls.' App'x Ex. 21, ECF No. 129-21 at 4. Moreover, the Preliminary S-4 included other additional details-such as the planned "Reincorporation Merger"-not mentioned in PWV's S-3 filed six months earlier. The Preliminary S-4 further stated that "[i]mmediatley following the Reincorporation Merger: [o]ur name will change from Pittsburgh & West Virginia Railroad' to Power REIT;'" that PWV and Power REIT would share the same West Babylon, NY offices, and that the business and management of PWV would not substantially change. Id., ECF No. 1291-21 at 10. PWV withdrew the Registration Statement on November 7, 2011 ...


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