Norfolk S. Ry. Co. v. W. Va. R.R., 2:11-cv-1588-TFM

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

2:11-cv-1588-TFM

UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA

Dated: June 19, 2014

MEMORANDUM OPINION AND ORDER OF COURT

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 itowned 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 DemisedProperty) 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-demisedproperty, 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, ¶ 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 familybusiness 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...