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

United States Court of Appeals, Third Circuit

August 29, 2017

NORFOLK SOUTHERN RAILWAY COMPANY; WHEELING & LAKE ERIE RAILWAY COMPANY
v.
PITTSBURGH & WEST VIRGINIA RAILROAD; POWER REIT, Appellants

          Submitted Under Third Circuit L.A.R. 34.1(a) January 19, 2017

         On Appeal from the United States District Court for the Western District of Pennsylvania (D.C. Civ. No. 2-11-cv-01588) District Judge: Honorable Terrence F. McVerry

          Steven A. Hirsch Keker Van Nest & Peters Counsel for Appellants

          Samuel W. Braver Kathleen J. Goldman Bradley J. Kitlowski Stanley J. Parker, Esq. Buchanan Ingersoll & Rooney, Danielle T. Morrison Nancy Winkelman Schnader Harrison Segal & Lewis Counsel for Appellees

          Before: AMBRO, VANASKIE, and SCIRICA, Circuit Judges

          OPINION

          VANASKIE, Circuit Judge.

         Appellants Pittsburgh & West Virginia Railroad ("PWV") and Power REIT challenge the District Court's interpretation of a 1962 lease of railroad property (the "Lease") to Norfolk Southern Railway Company ("Norfolk Southern").[1]In particular, Appellants contest the District Court's use of course-of-performance evidence to bolster its conclusions with respect to the disputed Lease provisions. Appellants also challenge the District Court's finding that they engaged in fraud to obtain Norfolk Southern's consent to a transaction otherwise prohibited by the Lease. We discern no error in the District Court's consideration of course-of-performance evidence, its interpretation of the Lease, and its finding of fraud. Accordingly, we will affirm the District Court's rulings.

         I.

         Norfolk Southern and PWV entered into the Lease on July 12, 1962, under which PWV leased to Norfolk Southern all of its right, title, and interest in certain railroad properties that it had owned and operated (the "Demised Property"). The Demised Property consists of a 112-mile tract of main line railroad (the "Rail Line") and approximately 20 miles of branch rail lines in Western Pennsylvania, Ohio, and West Virginia. After securing appropriate regulatory approvals, the Lease went into effect on October 16, 1964. The term of the Lease is 99 years, renewable in perpetuity at the option of Norfolk Southern absent a default. On May 17, 1990, Norfolk Southern entered into a sublease with Appellee Wheeling & Lake Erie Railway Company ("Wheeling & Lake Erie"), pursuant to which Wheeling & Lake Erie assumed the rights, interests, duties, obligations, liabilities, and commitments of Norfolk Southern as lessee, including the role as principal operator of the Rail Line. Power REIT is a real estate investment trust which, as of its formation in 2011, owns PWV as a wholly owned subsidiary.

         The Lease contains several sections relevant to the present dispute. Section 4(a) establishes the rent owed under the Lease, which consists of a fixed cash payment of $915, 000 per year. Section 4(b) provides for several forms of additional rent, which include:

(1) Sums equal to the deduction for depreciation or amortization with respect to the demised property allowed to [PWV] for such year under the provisions of the then effective United States Internal Revenue Code . . . .
(5) Except as otherwise provided in Section 5 hereof, all interest, expenses, fees and any other sums . . . payable by [PWV] and regardless of whether accrued or payable in respect of a period prior to the commencement of the term of this Lease. The foregoing sums shall be paid or discharged by [Norfolk Southern] as and when they become due and payable.
(6) Such sums, if any, as may be required to pay all obligations reasonably incurred by [PWV] for the doing of all acts and things which [PWV] may be lawfully required to do or perform under the provisions of this Lease or of any law or by any public authority, or for the doing of all acts and things necessary or desirable for the protection during the existence of this Lease of [PWV's] rights in the demised property or the rentals or other sums payable pursuant to this Lease, except such obligations incurred by [PWV] solely for the benefit of its stockholders or reasonably allocable thereto, or in connection with nondemised property or reasonably allocable thereto.
(7) All taxes, assessments and governmental charges, ordinary and extraordinary, regardless of whether relating to or accrued or payable in respect of a period prior to the effective date of this Lease, which are lawfully imposed upon [PWV] or the demised property or its income or earnings or upon any amount payable to any security holder of [PWV] which [PWV] has agreed to pay or discharge, except for any income taxes of [PWV] incurred with respect to rent paid pursuant to Section 4(a) hereof, any taxes arising after commencement of the term of this Lease in respect of nondemised property or the income therefrom, or any taxes incurred by [PWV] solely for the benefit of its stockholders or reasonably allocable thereto. The foregoing sums shall be paid or discharged by [Norfolk Southern] as and when they become due and payable.

(App. 834-35.) The parties dispute whether additional rent and attorneys' fees are owed under these sections and whether Norfolk Southern is in default for failure to pay them.

         Section 9 allows for certain dispositions of the Demised Property by Norfolk Southern to third-parties. Section 9 states:

Such demised property as shall not in the opinion of [Norfolk Southern] be necessary or useful may be sold, leased or otherwise disposed of by [Norfolk Southern], and [PWV] shall execute and deliver such instruments as may be necessary or appropriate to effectuate such transactions; provided, however, that such sales, leases or other dispositions of property shall be made in compliance with the applicable provisions of any mortgage or other agreement of [PWV] relating thereto. The proceeds of sale, condemnation, or other disposition of the demised property of [PWV] shall, subject to the provisions of any mortgage or other agreement relating to such property, be paid to [Norfolk Southern] and shall be indebtedness of [Norfolk Southern] to [PWV].

         The parties dispute whether the Lease requires that Norfolk Southern pay to PWV or record as indebtedness to PWV the proceeds from any licenses, easements, and oil and gas extraction leases of the Demised Property entered into by Norfolk Southern pursuant to Section 9.[2]

         Section 16 governs the payment and accounting of sums due as additional rent under Section 4(b) or any amounts owed as a result of "dispositions" covered by Section 9. These payments may, at the option of Norfolk Southern, be paid in cash or credited to PWV as indebtedness. Under Section 16(b), "the total of such indebtedness . . . shall not exceed at any time an amount equal to 5% of the value at such time of the total assets of [PWV] as long as any of the obligations of [PWV] which have been assumed by [Norfolk Southern] in this Lease remain outstanding and unpaid." Section 16(b) then requires that "[f]rom time to time a balance of the indebtedness arising under this Lease of [PWV] to [Norfolk Southern] and of [Norfolk Southern] to [PWV] shall be determined." To comply with Section 16(b), the parties used a "Settlement Account" as a mechanism to track the indebtedness owed under Sections 4(b)(1)-(4) and Section 9. The parties dispute whether this 5% cap on the balance still applies given that Norfolk Southern had paid off all debt it assumed under the Lease no later than 1982. The parties also dispute whether Norfolk Southern complied with the terms of the Lease in reporting its indebtedness in the Settlement Account.

         The Lease also subjects PWV to certain restrictions as long as Norfolk Southern is not in default of its obligations under the Lease. Section 8(a)(1) requires that PWV take all action within its control to preserve its corporate existence and Section 8(a)(2) prohibits PWV from issuing any stock without Norfolk Southern's prior written consent, which must not be unreasonably withheld. Section 8(a)(5) restricts PWV's ability to "borrow any money, assume any guaranty, make advances (except pursuant to commitments made prior to the date of this Lease) or enter into an agreement to make advances. . . ." (App. 839.) Norfolk Southern contends ...


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