NORFOLK SOUTHERN RAILWAY COMPANY et al v. PITTSBURGH & WEST VIRGINIA RAILROAD et al
Filing
232
MEMORANDUM OPINION AND ORDER OF COURT denying the 196 Motion for Partial Summary Judgment filed by Defendants/Counterclaim Plaintiffs Pittsburgh & West Virginia Railroad and Power REIT; granting the 198 Motion for Partial Summary Judgment filed b y Plaintiffs/Counterclaim Defendants Norfolk Southern Railway Company and Wheeling & Lake Erie Railway Company; and denying 226 Plaintiffs' Supplemental Motion to Deem Admitted Certain Paragraphs of Plaintiffs' Statement of Material Facts and to Strike Objections. Signed by Judge Terrence F. McVerry on 04/22/15. (mcp)
IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF PENNSYLVANIA
)
NORFOLK SOUTHERN RAILWAY
)
COMPANY and WHEELING & LAKE ERIE )
RAILWAY COMPANY,
)
2:11-cv-1588-TFM
)
Plaintiffs,
)
)
vs.
)
)
PITTSBURGH & WEST VIRGINIA
)
RAILROAD and POWER REIT,
)
)
Defendants.
)
MEMORANDUM OPINION AND ORDER OF COURT
Pending before the Court is a MOTION FOR PARTIAL SUMMARY JUDGMENT
(ECF No. 196) filed by Defendants/Counterclaim Plaintiffs Pittsburgh & West Virginia Railroad
and Power REIT; a MOTION FOR PARTIAL SUMMARY JUDGMENT (ECF No. 198) filed
by Plaintiffs/Counterclaim Defendants Norfolk Southern Railway Company and Wheeling &
Lake Erie Railway Company; and PLAINTIFFS’ SUPPLEMENTAL MOTION TO DEEM
ADMITTED CERTAIN PARAGRAPHS OF PLAINTIFFS’ STATEMENT OF MATERIAL
FACTS AND TO STRIKE OBJECTIONS (ECF No. 226).1 The issues have been fully briefed
and well-argued by the parties in their memoranda (ECF Nos. 197, 199, 210, 213, 217, 220, 221,
229, 230), and the factual record has been thoroughly developed via their Concise Statements of
Material Facts (“CSMF”), appendices, exhibits, and Responsive Statements of Facts (“RSOF”)
(ECF Nos. 200, 201, 202, 203, 204, 207, 208, 209, 211, 212, 216, 218, 224). The Court heard
1. The Motion for Partial Summary Judgment filed on behalf of Defendant(s) is styled as “DEFENDANT
PITTSBURGH & WEST VIRGINIA RAILROAD’S MOTION FOR PARTIAL SUMMARY JUDGMENT” with
no mention of Power REIT despite it having been joined to the counterclaims that are the subject of this motion. See
ECF Nos. 70, 71, 187, 191. Where appropriate, the Court will refer to “Defendants.”
oral argument on December 16, 2014, and the transcript has been filed of record (ECF No. 231).
Accordingly, the motions are ripe for disposition.
I. Background
A. Factual Background2
The following background is taken from the Court’s independent review of the motions
for summary judgment, the filings and arguments in support and opposition thereto, and the
record as a whole.
1. The Parties
This action concerns a lease entered into between The Pittsburgh & West Virginia
Railway Company (“Pittsburgh & West Virginia”) and Norfolk and Western Railway Company
2. Plaintiffs’ motion the Court to deem admitted one-hundred-and-thirty-nine (139) paragraphs of their CSMF (ECF
No. 200) and Statement of Additional Undisputed Facts (ECF No. 207) and strike, or in the alternative overrule, all
objections thereto due to Defendants’ alleged noncompliance with Local Civil Rule of Court 56, namely their failure
to support denials with citations to the record and improper use of evidentiary objections in their responsive
statements of material facts (ECF Nos. 209, 224). For example, the majority of Defendants’ denials set forth the
following response, with some slight variation as to the evidentiary objection(s):
Denied as the document cited by Plaintiffs do not support this statement. Moreover, this statement
is denied based upon Plaintiffs’ mischaracterizations of the cited document. Finally, Defendants
object to the allegations set forth in paragraph [n] as irrelevant, (Fed. R. Evid. 401, 402, 403), (b)
inadmissible hearsay (Fed. R. Evid. 801, 802) and/or (c) Ex. [n] is not properly authenticated (Fed.
R. Evid. 901).
See, e.g., id. at ¶¶ 35, 36, 37, 38, 39, 40, 42, 43, 50, 54, 72, 73, 74, 75, 77, 78, 109, 137, 139, 142, 151, 158, 167,
174, 177, 184, 185, 186, 187, 188, 189, 190, 194, 195, 196, 197, 198, 200, 201, 203, 204, 205, 206, 207, 208, 209,
210, 211, 212, 213, 214, 215, 216, 220, 227, 228, 229, 230, 231, 237, 238, 239, 242, 243, 253, 258, 259, 265, 268,
269, 270, 271, 273, 281, 283, 301, 305, 306, 308, 322, 323, 334, 341, 353, 354, 359, 367, 371, 372, 374, 378, 379,
380, 398, 399, 400, 403, 404, 405, 413. For others, Defendants respond in a similar fashion:
Denied to the extent the allegations contained in Paragraph [n] refer to writings, documents which
speak for themselves and the allegations are, therefore, denied to the extent that the allegations do
not accurately and completely reflect the writings. Defendants object to the allegations set forth in
paragraph [n] as irrelevant (Fed. R. Evid. 401, 402, 403).
See, e.g., id. at ¶¶ 96, 103, 168, 254, 255, 294, 370, 401. Nowhere do Defendants include an appropriate reference
to the record to support the basis of these denials. The Court is instead left guessing. At the same time, the Court is
reluctant to resolve the cross-motions for summary judgment based on a procedural technicality rather than merits of
the claims, and therefore, it will deny Plaintiffs’ motion. Accordingly, the Court has conducted an independent
review of the record and has included those facts that are material, supported by the evidence and are otherwise
admissible at trial.
2
(“Norfolk and Western”) in 1962 (the “Lease”). Under the Lease, Pittsburgh & West Virginia
conveyed to Norfolk and Western all of its right, title, and interest in and to certain of its
properties, including 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.
Norfolk Southern Railway Company (“Norfolk Southern”) is the successor to the interest
of Norfolk and Western in the Lease. Wheeling & Lake Erie Railway Company (“Wheeling &
Lake Erie”) became the Sublessee on May 17, 1990 when it entered into an agreement with
Norfolk Southern to assume the rights, interest, duties, obligations, liabilities, and commitments
of Norfolk and Western as lessee, including the role of being principal operator of the Rail Line
(the “Sublease”). See Pls.’ App’x Ex. 2 at 1-2, ECF No. 201-2.
Pittsburgh & West Virginia Railroad (“PWV”) is a business trust and the successor-ininterest to The Pittsburgh & West Virginia Railway Company. Power REIT is a real estate
investment trust which was formed in 2011 as part of a reverse triangular merger of PWV. After
that reorganization, PWV became a wholly-owned subsidiary of Power REIT.
2. The Lease
The Lease is dated July 12, 1962 and contains a pre-printed “SEAL” notation following
the parties’ signatures. See Pls.’ App’x Ex. 1 at 1, 19, ECF No. 201-1. The term of the Lease is
99-years, renewable in perpetuity at the option of the Lessee absent a default. See id. at 3-4. The
same terms and conditions, including the economic provisions of the Lease, remain in effect with
each renewal. See id. at 4.
3
a. The Property (Not) Demised
Section 1 sets forth the parties’ agreement as to what comprises the “Demised Property”
under the Lease:
Except for such property as shall be hereinafter specifically excluded by
Section 2 hereof, Lessor does hereby lease, assign, transfer and deliver to Lessee,
its successors and assigns, for the term hereinafter set forth, and Lessee does
hereby accept from Lessor all of Lessor’s right, title and interest in and to all its
property, real, personal and mixed, including equipment, machinery, tools,
materials and supplies, cash, investments, securities, claims, intangibles, choses in
action, rights (contractual or otherwise), obligations, interests, leaseholds and
franchises, and including without limitation:
(a) The railroad properties consisting of real estate owned and
operated by Lessor and described in Schedule A attached hereto.
(b) The additional property of a miscellaneous nature described in
Schedule B attached hereto.
(c) All property acquired in replacement of or substitution for, and all
additions, betterments and improvements to and extensions of, the property
covered by this Section 1, and all after-acquired property of Lessor, acquired
during the term of this Lease and appurtenant to or useful upon or in
connection with the property covered by this Section 1, except for afteracquired property acquired by Lessor with the proceeds of the rent paid or
payable by Lessee pursuant to subdivision (a) of Section 4 hereof . . . .
Id. at 1. Section 1 also provides that “Lessor will execute and deliver all such instruments, if
any, as may be necessary to assign or confirm to Lessee any of the property demised . . . .” Id.
Schedule A describes Lessor’s “Real Estate Railroad Properties” to be “[a]ll right, title
and interest of The Pittsburgh & West Virginia Railway Company in and to any and all land and
improvements or other inherently permanent structures situate thereon which may be under,
along or adjacent to [(1) the Rail Line and (2)-(6) branch lines of railroad known as the Donora
Branch, Clairton Branch, Mifflin Branch, West End Branch, and Bell Branch].” Id. at 24-26.
Schedule B describes Lessor’s “Additional Properties” to be
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All right, title and interest of The Pittsburgh & West Virginia Railway
Company, whether legal or equitable, in and to all equipment, machinery, tools,
material and supplies, cash, investments, securities, claims, intangibles, choses in
action, rights (contractual or otherwise), interests, franchises and all other
property owned by The Pittsburgh & West Virginia Railway Company, excepting
real properties listed on Schedule A hereto and property not demised listed in
Section 2 hereof.
Id. at 26. As the Sublessee, Wheeling & Lake Erie presently holds all right, title and interest in
the property covered under the Lease.
Section 2 excludes the following property (the “Nondemised Property”) of Lessor from
the Lease:
(a) Motive power and rolling stock owned by Lessor at the commencement of
the term of this Lease as provided in Section 3 hereof . . . .
(b) Shares of stock issued by Lessor and held in its treasury at the
commencement of the term of this Lease as provided in Section 8 hereof.
(c) Books and records of Lessor which are needed by Lessor in order to carry
out its obligations under this Lease.
(d) Rights, privileges and franchises of Lessor requisite for the preservation of
its corporate existence and for the proper performance by it of the terms and
provisions of this Lease or of any obligations imposed by law.
(e) After-acquired property acquired by Lessor with the proceeds of the rent
paid or payable by Lessee pursuant to subdivision (a) of Section 4 hereof.
Id. at 2. The final clause of Section 2 permits Lessor, without first securing the consent of
Lessee, to “sell, lease, mortgage, pledge, transfer, dispose of, invest and reinvest all or any part
of the nondemised property covered by this Section 2, except that covered by subdivisions (a)
and (b) hereof, or the proceeds thereof or the income therefrom.” Id.
5
b. Rent
Rent under the Lease consists of a cash payment fixed at $915,000 per year (Section 4(a))
as well as additional items attributable to the real properties (Section 4(b)). See id. at 4-6.
Relevant here, the “Additional rent” includes the following:
(1)
Sums equal to the deduction for depreciation or amortization with
respect to the demised property allowed to Lessor 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 (except for principal, sinking fund payments or
other sums to be paid or advanced pursuant to Section 7 hereof and except for any
obligations incurred by Lessor solely for the benefit of its stockholders or
reasonably allocable thereto) payable by Lessor 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 Lessee as and when
they become due and payable.
(6)
Such sums, if any, as may be required to pay all obligations
reasonably incurred by Lessor for the doing of all acts and things which Lessor
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
Lessor’s rights in the demised property or the rentals or other sums payable
pursuant to this Lease, except such obligations incurred by Lessor 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
Lessor or the demised property or its income or earnings or upon any amount
payable to any security holder of Lessor which Lessor has agreed to pay or
discharge, except for any income taxes of Lessor 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 Lessor solely for the benefit of its stockholders or
reasonably allocable thereto. The foregoing sums shall be paid or discharged by
Lessee as and when they become due and payable.
Id. at 4-5. Additional rent also includes sums equal to the tax deductions allowed to Lessor for
retirement or abandonment of depreciable Demised Property of Lessor solely on account of
6
casualty, abnormal obsolescence or other cause not taken into consideration in determining the
rate of depreciation or amortization (Section 4(b)(2)); for retirement or abandonment of nondepreciable Demised Property of Lessor (Section 4(b)(3)); and for amortization of discount and
expense on funded debt and equipment or other obligations of Lessor (Section 4(b)(4)). Id.
c. Indebtedness
Several sections of the Lease outline the rights and obligations of the parties with regard
to indebtedness. The relevant provisions are as follows:
i. Operation, Maintenance, Extensions and Improvements
Section 6 requires Lessee, at its own expense and without deduction from the rent, to
“maintain, manage and operate the demised property in the manner required by law” and to
“[i]ndemnify and hold Lessor harmless from all claims, demands, suits, causes of action, loss,
damage, liability or expense which Lessor may incur or for which it may become liable, except
to Lessee or to Lessor’s stockholders . . . .” Id. at 7. In addition, Section 6 calls for Lessee to
make extensions, additions, betterments and improvements to the Demised Property that it, in its
discretion, considers necessary or desirable. Id. Any such extensions, additions, betterments and
improvements constitute an indebtedness of Lessor to Lessee. Id.
ii. Debts of Lessor
Under Section 7, Lessee agrees “to pay or discharge on behalf of Lessor, as and when the
same shall become due and payable, all obligations of Lessor for payment of principal and
sinking funds as well as any other payments which Lessor may be obligated to make by reason
of its guaranties or its agreements to make advances or its agreements to purchase real or
personal property of any kind . . . .” Id. at 7-8. All sums paid by Lessee in accordance with
Section 7 are a “debt obligation” of Lessor to Lessee. See id. at 8.
7
iii. Disposition of Property of Lessor
Section 9 of the Lease states as follows:
Such demised property as shall not in the opinion of Lessee be necessary
or useful may be sold, leased or otherwise disposed of by Lessee, and Lessor 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 Lessor relating thereto. The
proceeds of sale, condemnation, or other disposition of the demised property of
Lessor shall, subject to the provisions of any mortgage or other agreement relating
to such property, be paid to Lessee and shall be indebtedness of Lessee to Lessor.
Lessee shall also be indebted to Lessor for the salvage value of demised property
upon its retirement or abandonment or other disposition or use to the extent that
salvage value thereof is not included in the proceeds referred to in the preceding
sentence.
Id. at 11-12.
iv. Miscellaneous
Section 16 addresses the payment and accounting of certain sums due as additional rent
under Section 4(b) or the amounts owed from Section 9 dispositions:
(a)
The portion of the additional rent, or any part thereof, payable to
Lessor pursuant to paragraphs (1), (2), (3), and (4) of subdivision (b) of Section 4
hereof and any amounts, or any part thereof, payable to Lessor pursuant to
Section 9 hereof may, at the option of Lessee, be paid either in cash or by
crediting Lessor with the same as indebtedness in an account of transactions under
this Lease provided, however, that the total of such indebtedness owing from
Lessee to Lessor, after taking into account the payments of cash hereunder or a
balancing of indebtedness under subdivision (b) of this Section 16, or both, shall
not exceed at any time an amount equal to 5% of the value at such time of the
total assets of Lessor as long as any of the obligations of Lessor which have been
assumed by Lessee in this Lease remain outstanding and unpaid. All cash
payments made by Lessee to Lessor as provided in this subdivision (a) shall
immediately be used by Lessor to pay and discharge such indebtedness of Lessor
to others as may be designated by Lessee.
Id. at 17. In turn, Section 16(b) requires that “[f]rom time to time a balance of the indebtedness
arising under this Lease of Lessor to Lessee and of Lessee to Lessor shall be determined . . . .”
Id. at 18.
8
d. Covenants of Lessor
As long as the Lease remains in effect, the parties agree to abide by several covenants,
two of which are relevant to the pending motions. First, Section 8(a)(3), often referred to as the
“Books and Records Provision,” provides as follows:
(a)
From the date of this Lease through the initial term thereof and
during any renewal thereof, as long as Lessee is not in default hereunder and
subject to any necessary governmental approval: . . .
(3)
Lessor shall permit at any and all reasonable times such
person or persons as Lessee may designate to inspect the books and
records of Lessor for any purpose whatsoever, and Lessee shall permit at
any and all reasonable times such person or persons as Lessor may
designate to inspect the books and records of Lessee for any purpose
whatsoever.
Id. at 8-9. Second, Section 8(b)(4) of the Lease provides that the Lessor assist the Lessee with
certain agreements concerning the Demised Property:
Lessor shall when requested by Lessee, to the extent permitted by law,
modify, extend, terminate, abandon or surrender any existing leases, agency,
trackage or other contracts or agreements made by Lessor or any of its
predecessors in title, or enter into any such new agreements, whenever in the
judgment of Lessee such modification, extension, termination, abandonment,
surrender or making of a new agreement would be beneficial to Lessee, but not in
disregard of any mortgages or other agreements covering such demised property.
Id. at 11. This latter covenant applies only “[a]fter the commencement of the term of th[e] Lease
and during any renewal thereof.” Id. at 10.
e. Termination of Lease & Default by Lessee
The Lease will terminate upon the expiration of its initial term (in 2063) or any renewal
thereof or at the option of Lessor in the event of a default by Lessee. See id. at 14-15. At the end
of the Lease, whether by expiration, default or termination for any other reason, Section 11
requires that “the demised property, or such portion thereof as shall remain . . . shall be returned
9
to Lessor in the same condition as it is in at the commencement of the term of th[e] Lease,
reasonable wear and tear excepted . . . .” Id at 14.
Section 12 sets forth the circumstances under which Lessor may declare a default. A
default will occur when Lessee fails to pay any part of the rent due under Section 4(a) after
having been given thirty days’ written notice, fails to perform in whole or in part any other
covenant, agreement, or obligation after having been given sixty days’ written notice, or
commences any proceedings for relief under any bankruptcy or insolvency law. Id. at 15. If
Lessor declares the Lease terminated, it is entitled to the “demised property and all revenues,
rents, issues, income and profits therefrom . . . [and] 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. Lessee has no right to have the Demised Property returned or the Lease reinstated by
making a tender or rent or other offer to cure its default under the Lease. See id.
3. The Formation of the Lease3
Before the execution of the Lease, Pittsburgh & West Virginia had sustained years of
operating deficits which impaired its working capital and general financial condition, resulting in
some doubt as to its future as an independent carrier. Beginning in 1960, Pittsburgh & West
Virginia took several steps in an attempt to reduce costs but was unsuccessful despite its efforts.
By 1962, Pittsburgh & West Virginia was burdened by significant debt obligations which it was
unable to service and had not operated at a profit for at least the past five years. Given its
3. Defendants object to any consideration of the circumstances surrounding the formation of the Lease, contending
that this factual material is irrelevant and barred by the parol evidence rule. The Court does not agree. See Pacitti v.
Macy’s, 193 F.3d 766, 773 (3d Cir. 1999) (“[T]he court reads the contract in the context in which it was made.”);
see also Richard A. Lord, 11 Williston on Contracts § 32:7 (4th ed. Supp. 2014) (“[A]lthough the parties may not,
because of the parol evidence rule, testify as to agreements they made before or contemporaneously with the
execution of the contract, the circumstances surrounding the execution of the contract bear on the contract’s
meaning.”) (citing Sanford Inv. Co., Inc. v. Ahlstrom Machinery Holdings, Inc., 198 F.3d 415 (3d Cir. 1999)).
10
financial straits, Pittsburgh & West Virginia’s leadership initiated efforts to affiliate it with a
larger rail carrier system.4
Around this same time, Norfolk and Western was in the process of completing its own
rail unification project. From 1961 to 1962, Norfolk and Western filed applications with the
Interstate Commerce Commission (the “ICC”), the predecessor regulatory agency of the Surface
Transportation Board (the “STB”), as part of its efforts to acquire the Wabash Railroad Company
(“Wabash”), the Sandusky, Ohio branch of the Pennsylvania Railroad and the Akron, Canton &
Youngstown Railroad. In addition, Norfolk and Western and The New York, Chicago and St.
Louis Railroad Company (“Nickel Plate”) filed a joint application with the ICC on March 17,
1961 for authority to merge the properties of Nickel Plate into Norfolk and Western. Nickel
Plate was considered to be Pittsburgh & West Virginia’s most important connection.
In early 1961, Chairman and President of Pittsburgh & West Virginia R.N. Shields
reported to its Board of Directors the merger proposals of the various railroads and the possible
effects of such mergers on the company. Shields advised that the Executive Committee of the
Board of Directors had recommended to the Board that it authorize management to intervene in
any merger proceedings in which Pittsburgh & West Virginia may have an interest. The Board
unanimously approved the recommendation.
With that authority, Pittsburgh & West Virginia filed a petition with the ICC in
September 1961 to intervene in the Norfolk and Western rail unification proceedings. The ICC
permitted the request, and Pittsburgh & West Virginia represented that it supported the
prospective unification of Norfolk and Western, Nickel Plate, Wabash and the Sandusky Line
4. On January 1, 1962, Charles T. Jones (then-First Vice President of Port Amherst Coal Company) and Lewis B.
Harder (then-Chairman of the Board of International Mining Corp.) were elected to the Board of Pittsburgh & West
Virginia. Herbert E. Jones, Jr. (then-President of Port Amherst Coal Company) was elected to the Board on May 23,
1962.
11
but that the merger would impair its interest if it were not included in the new system. In
response, Norfolk and Western apparently indicated its willingness to negotiate with Pittsburgh
and West Virginia.
On March 16, 1962, Shields presented to the Board a letter from John P. Fishwick, Vice
President – Law, of Norfolk and Western that memorialized a February 15, 1962 meeting
between the parties at which Pittsburgh & West Virginia suggested that Norfolk and Western
consider leasing its properties at an annual cash rental.5 The letter also confirmed that Norfolk
and Western was willing to lease the assets of Pittsburgh & West Virginia and assume its
liabilities, subject to various terms outlined in the correspondence. Pittsburgh & West Virginia’s
Board resolved to defer any action on the proposal pending discussions with the President of
Norfolk and Western as to alternative methods of affiliation. The Board convened again on
March 26, 1962 to further discuss and consider the proposed lease. Thomas W. Pomeroy Jr.,
general counsel of Pittsburgh & West Virginia, attended both the March 16 and 26, 1962
meetings, to report on the ongoing negotiations with Norfolk and Western and the implications
of the Lease.
On May 7, 1962, the Board held another meeting at which Pomeroy once again reported
in detail on the proposed lease of Pittsburgh & West Virginia’s assets to Norfolk and Western.
At the meeting, Pomeroy also distributed to the Board a brief outline of the salient features of the
proposed agreement. After hearing from Pomeroy and considering the proposal, the Board
approved the Lease subject to the authorization of its shareholders and the ICC.
On September 28, 1962, the shareholders of Pittsburgh & West Virginia voted in favor of
the Board’s resolutions relating to the approval, adoption and ratification of the Lease. By Order
5. Plaintiffs allege that, although Norfolk and Western initially considered acquiring Pittsburgh & West Virginia, it
ultimately concluded that a merger or cash purchase would dilute its earnings because the “entire railroad is worth
far less than the book value.” Pls.’ App’x Ex. 139 at 6, ECF No. 201-139.
12
of the ICC, hearings were then held regarding the Lease on October 30 and 31, 1962.
Approximately six months later, Hearing Examiner Lester R. Conley issued a Report and Order
in which he found that the Lease was consistent with the public interest. The Lease was
ultimately approved.
4. The Performance of the Lease
The Lease became effective on October 16, 1964.6 At that time, Lewis B. Harder was
Chairman of the Board of Directors of Pittsburgh & West Virginia, Charles T. Jones was
President, Herbert E. Jones, Jr. (“Mr. Jones, Jr.”) was Vice President, Louis B. Stein was
Secretary – Treasurer, and Joseph C. Bennett was Assistant Secretary – Assistant Treasurer.
After the Lease went into effect, Pittsburgh & West Virginia closed its general and operational
offices and ceased active railroad operations.
On February 18, 1967, PWV was organized as a business trust for the purpose of
acquiring the assets of Pittsburgh & West Virginia, which allowed the Lessor to receive more
favorable tax treatment.7 Unlike its predecessor, PWV would not be taxable as a corporation for
federal income tax purposes, allowing it to pass on intact the cash rental received under the
6. In a memorandum dated October 8, 1964, Pomeroy outlined the ongoing functions of Pittsburgh & West Virginia
following the commencement of the Lease. As part of the transitional steps in consummating the Lease, the
memorandum itemized that Pittsburgh & West Virginia would have to transfer to Norfolk and Western “various
agreements with third parties, including side-track agreements, public utility cross agreements, etc.” Pls.’ Ex. 120 at
2, ECF No. 201-120. Under the heading “things to be done by P & WV as lessor under the lease to N & W,” the
memorandum further advised that Pittsburgh & West Virginia was responsible for “[c]ollection of cash rental
installment[s],” the “[e]stimate of non-cash rental under Section 4(b)” and to “police the application of non-cash
rental under Section 4(b) from year to year and perform the calculations stipulated in Section 16(a) in regard to the
same.” Id. Citing to Section 8(b)(4) of the Lease, the memorandum also noted that Pittsburgh & West Virginia
would have to “[m]odify leases or agreements or enter into new ones upon request of Lessee . . . .” Id. at 3.
7. In its filings with the ICC and the Internal Revenue Service (“IRS”) related to its proposed reorganization,
Pittsburgh & West Virginia made references to the Lease. For example, in a February 14, 1967 Request for Ruling
sent to the IRS, Pittsburgh & West Virginia represented that “[it] transferred substantially all its assets to Norfolk
and Western” under the Lease. Pls.’ Ex. 144 at 2, ECF No. 201-144; see also Pls.’ Ex. 82 at 9, ECF No. 201-82
(mentioning, in a March 19, 1967 application to the ICC, the “federal income tax deductions allowed to N&W for
depreciation and amortization with respect to leased property and PWV’s funded debt . . . .”). Pittsburgh & West
Virginia did not advise the IRS that it had reserved any rights to receive income from third-party agreements
concerning the Demised Property, such as licenses, leases, easements, oil and gas leases, or coal leases.
13
Lease in the form of direct payments or distributions to its shareholders. PWV acquired all of
the assets and assumed all of the obligations of Pittsburgh & West Virginia on December 29,
1967.
a. Third-Party Agreements
The parties and their predecessors have entered into numerous third-party agreements in
the form of licenses, easements, and leases throughout the fifty-year history of the Lease as well
as in the decades preceding its effective date. Aside from these transactions, the (Sub)-Lessee(s)
have also sold portions of the Demised Property in accordance with Section 9 of the Lease.
i. Licenses
The licenses include agreements for the right to build and maintain pipelines, electrical
wires, cable transmission lines and access roads crossing the Demised Property. For example, on
June 27, 1951, Pittsburgh & West Virginia granted The Manufacturers Light & Heat Company
(“Manufacturers”) a license to lay a gas pipe under a portion of the Rail Line in Union
Township, Washington County.
The license agreement with Manufacturers sets forth
requirements for the depth of the pipeline and provides that it must maintain the pipeline so as to
not interfere with the operation of the railroad. After the Lease commenced, Norfolk and
Western assumed responsibility of the license. As of 1965, Norfolk and Western was receiving
$328 per year from Manufacturers for various licenses on the Rail Line, including $132 annually
from the 1951 agreement. Manufacturers later merged into Columbia Gas Transmission Corp.
(“Columbia Gas”). Once it became the Sublessee, Wheeling & Lake Erie negotiated with
Columbia Gas in 1992 and in 2002 for increases in the rent payable under the agreement.
In addition, Pittsburgh & West Virginia entered into a license agreement on October 13,
1947 with West Penn Power Co. (“West Penn”) for the construction and maintenance of a pole
14
and power line over its property. The license requires West Penn to alter, improve, repair,
renew, remove or relocate the power line or pole if reasonably necessary or required for the
proper, safe and convenient operation of the railroad. In 2002, Wheeling & Lake Erie negotiated
an increase in the rent payable under this agreement.
The parties have also entered into new license agreements since the commencement of
the Lease: Norfolk and Western granted licenses to West Penn in 1966 and to Columbia Gas in
1984; and Wheeling & Lake Erie granted Columbia Gas a license 2008.
ii. Easements
As with the licenses, the parties have granted easements relating to the Demised Property.
In the mid-to-late 1970’s, the Board of Public Education of the School District of Pittsburgh (the
“Board of Education”) began a construction project for the John A. Brashear High School and
sought a temporary license from Norfolk and Western to build a pipeline and sewer system under
the Rail Line.
Norfolk and Western granted the temporary license, which the Board of
Education later sought to replace with an easement. At a meeting of its Board of Directors,
Norfolk and Western resolved to grant the Board of Education an easement pursuant to Section 9
of the Lease in exchange for $5,000. However, a landslide and related engineering problem
during the construction project delayed the execution of the easement agreement between the
parties. After the issues were resolved several years later, Norfolk and Western obtained the
signatures of PWV’s trustees to execute the agreement. The Board of Education, with PWV
aware of the facts, paid the $5,000 consideration to Norfolk and Western.
More recently, on September 15, 1997, Wheeling & Lake Erie entered into an agreement
in which it granted Equitrans, L.P. an easement to construct and maintain a natural gas pipeline
under the Demised Property. This agreement addresses the disruption to rail operations that may
15
result from its implementation or operation by including a provision for the furnishing of
flagmen and watchmen.
iii. Land Leases
Aside from licenses and easements, the parties have entered into land leases. The earliest
agreement dates back to January 2, 1919 when Pittsburgh & West Virginia leased to
Monongahela Southern Railroad Co. (“Monongahela Southern”) a piece of land in Mifflin
Township, Allegheny County in exchange for an annual rental. Monongahela Southern later
became Union Railroad Co. (“Union Railroad”), which constructed a track that connected to the
Rail Line. After the Lease commenced, Norfolk & Western negotiated a rent increase with
Union Railroad.
Wheeling & Lake Erie and Union Railroad later replaced the original
agreement with a new land lease.
Similarly, on January 1, 1960, Pittsburgh & West Virginia leased to Mark Lumber &
Supply Company (“Mark Lumber”) a sidetrack and an adjacent area along the Demised Property.
On January 1, 1968, Norfolk and Western and Mark Lumber agreed to enter into a new lease to
facilitate the expansion and modernization of facilities on the leased premises with Mark
Lumber, as lessee, paying an annual rental to Norfolk and Western, as lessor. Mark Lumber later
changed its name to Tot’um Lumber & Supply Company (“Tot’um Lumber”) and entered into a
lease extension with Norfolk and Western in 1978.
As Sublessee, Wheeling & Lake Erie has likewise entered into third-party lease
agreements.
On April 10, 2007, Wheeling & Lake Erie leased to Modern Transportation
Services (“Modern”) sidetrack and several parcels of the Demised Property, one of which
includes a warehouse building that Modern uses for loading, unloading and storing its goods.
16
Wheeling & Lake Erie also entered into a land lease with the Lamar Companies (“Lamar”) on
September 16, 2010 for a portion of the Demised Property to use and occupy for a billboard sign.
There was further discussion of billboards on the Demised Property in 2010 when Matt
Larson, a consultant with MRL Investments, Ltd., proposed a reorganization of PWV, which
involved leases Wheeling & Lake Erie had entered into with outdoor advertising companies. On
May 6, 2010, PWV’s officers and Board of Trustees, including David Lesser and Virgil Wenger,
scheduled a conference call to discuss Larson’s proposal. Afterward, Wegner sent to those who
participated in the conference call an e-mail in which he referenced the income Norfolk Southern
generates from its billboard locations on the Demised Property. The Larson proposal was
ultimately rejected.
iv. Oil and Gas Leases8
Oil and gas leases are among the agreements that pertain to the subsurface rights of the
Demised Property. One such agreement originated in February 5, 1942 when David and Bessie
Wells leased to Jane Rankin the oil and gas rights for a parcel of land that they owned.
Monongahela Valley Area Enterprises, Inc. later acquired from the Wells’ their title to the land,
which it sold to Pittsburgh & West Virginia in 1958. The Peoples Natural Gas Company
(“Peoples”) acquired the lessee’s interest at some point before 1960.
After the commencement of the Lease, Peoples initially withheld royalty payments from
Norfolk and Western pending receipt of a Notice of Transfer form from Pittsburgh & West
Virginia. On June 1, 1966, Bennett, the then-Vice President and Assistant Secretary – Assistant
8. In addition to the oil and gas leases discussed below, the summary judgment record includes other examples
whereby Wheeling & Lake Erie permitted third-parties to extract subsurface minerals from the Demised Property.
See, e.g., Defs.’ Ex. 84, ECF No. 203-13 (a March 11, 2010 lease entered into between Dale Property Services Penn,
L.P. and Wheeling & Lake Erie); Ex. 113, ECF Nos. 71-74 (a June 22, 2012 oil and gas lease entered into between
Chesapeake Exploration, L.L.C. and Wheeling & Lake Erie). Wheeling & Lake Erie apparently received royalties
and bonus payments as consideration for the agreements, although the details of those transactions are not clear. See
Defs.’ Ex. 112, ECF No. 203-70 (reproducing a spreadsheet listing “one time payments”).
17
Treasurer of Pittsburgh & West Virginia and a member of its Board, executed a form entitled
“Notice of Transfer Oil and Gas Lease Rental and/or Royalty,” which was attested to by Stein,
the then-Secretary –Treasurer of Pittsburgh & West Virginia and a member of its Board. The
Notice states that Pittsburgh & West Virginia has leased certain parcels of land to Norfolk and
Western “reserving nothing, including all [its] right, title and interest in and to the oil and gas
underlying the premises conveyed and the rentals, royalties or other income and benefits arising
from same, . . . ” subject to the 1942 oil and gas lease. Pls.’ App’x Ex. 97, ECF No. 201-97 at 3.
The Notice further authorized Peoples to pay to Norfolk and Western, its successors or assigns
the gas rentals or royalties under the 1942 lease. A fully executed Notice of Transfer was
provided to Peoples on March 2, 1967. Norfolk and Western/Norfolk Southern or Wheeling &
Lake Erie have since received rentals, royalties or other income arising from the 1942 lease.
PWV has made similar representations regarding the Lease on other occasions as well.
In 1987, PWV received an inquiry from Questa Petroleum Company (“Questa”), an independent
oil and gas drilling company, expressing interest in leasing acreage in Perry Township, Fayette
County, Pennsylvania. In response, PWV advised Questa that “all properties of Pittsburgh &
West Virginia Railroad are leased to Norfolk and Western Railway Company” and that it would
forward the inquiry to Norfolk and Western. Pls.’ App’x Ex. 106 at 2, ECF No. 201-106.
As Sublessee, Wheeling & Lake Erie entered into an oil and gas lease with KIS Oil &
Gas, Inc. (“KIS”) on October 18, 2006. The lease includes provisions for royalty payments and a
signing bonus to be paid to Wheeling & Lake Eire. As with the other third-party agreements,
this lease addresses the operational issues of oil and gas exploration near the Rail Line.
18
v. Coal Leases
Coal leases are the last of the third-party agreements related to the Demised Property. On
October 11, 1973, Norfolk and Western entered into a lease with Twilight Industries Division of
U.S. Natural Resources Inc. (“Twilight”), which granted it the right to mine a certain seam of
coal on a tract of the Demised Property. In exchange, Twilight agreed to provide to Norfolk and
Western a one-time payment of $174.30, plus a royalty of $0.50 per ton of coal mined. After
receiving a request from Norfolk and Western, Stein executed the coal lease in January 1974 and
arranged for two other trustees of PWV to sign the agreement.
Approximately seven years later, Norfolk & Western sent PWV a correspondence
regarding a proposed coal lease with The Youghiogheny and Ohio Coal Co. (“Y&O”). In the
January 13, 1981 letter, Norfolk and Western stated that “Section 9 of the 1962 Lease between
[the parties] does not require execution of the contract on behalf of PWV. Any proceeds
received by NW as a result of the proposed lease should be subject to the P&WV First
Mortgage.” Pls.’ App’x Ex. 156 at 1, ECF No. 201-156. Norfolk and Western and Y&O entered
into the coal lease on February 1, 1981.
b. The Settlement Account
The so-called “Settlement Account” is a term historically used by the parties to refer to
an accounting mechanism for tracking indebtedness under Sections 4(b)(1)-(4), Section 6,
Section 7, Section 9 and Section 16(a). The term appears nowhere in the Lease.
From at least 1980 through 2011, Norfolk and Western/Norfolk Southern assisted with
the preparation of PWV’s tax returns and financial statements, and in doing so, calculated the
balance of the Settlement Account on an annual basis. Beginning in the mid-2000’s, PWV sent
requests to Norfolk Southern asking for it confirm the balance of the Settlement Account to
19
PWV’s certified public accountants, Gibbons & Kawash, as part of an audit of its financial
statements, which were later reported to the Securities and Exchange Commission (“SEC”) and
public shareholders. Shortly after Norfolk Southern commenced this action, it advised PWV that
it would no longer provide its services.
As of December 31, 2012, the Settlement Account reportedly had a balance of
$16,660,850.63 in favor of PWV. At that time, PWV’s asset value was $9,150,000 according to
its audited financial statements.9
Norfolk and Western/Norfolk Southern have consistently represented the balance of the
Settlement Account without tracking the income that the (Sub)-Lessee has received from the
third-party agreements—i.e., the licenses, easements and leases. Norfolk and Western/Norfolk
Southern have, however, reflected the proceeds from sales of portions of the Demised Property
in the Settlement Account.
Until this litigation, PWV never disputed the treatment of the Settlement Account,
submitted a demand for all or part of the indebtedness tracked by the Settlement Account, or
requested payments that related to any third-party party agreements concerning the Demised
Property. PWV likewise never demanded or asserted prior to this lawsuit that Norfolk Southern
owed interest on indebtedness tracked in the Settlement Account.
c. Debt Obligations
Around the time that the Lease commenced, PWV’s total debt obligations amounted to
approximately $6,200,000. Until those obligations were satisfied in full, Norfolk and Western
9. In a February 15, 2013 letter from Norfolk Southern to PWV, Michael F. Cox, Assistant Vice President – Tax
Administration, represented that the following adjustments had been made to the Settlement Account since
December 31, 2011 when it had a balance of $16,236,808.66: $341,768.00 in Section 4(b)(1) depreciation;
$69,663.00 for 2006 capital gains tax entry; and $12,610.97 for gain related to 2011 land sales, totaling
$16,660.850.63 as of December 31, 2012. See Defs.’ App’x Ex. 34, ECF No. 202-35 at 1-2. PWV contends that it
is entitled to be paid in cash any amount that exceeds that 5% Cap Provision, which includes the $341,768.00 in
depreciation and amortization as “additional rent.”
20
used the proceeds from sales of parcels of the Demised Property to pay down PWV’s debt. For
each sale, Norfolk and Western had Mellon Bank, N.A. (“Mellon Bank”), the successor to the
party that issued the debt obligations, execute a form titled “Partial Release of Lien of
Mortgage.” Norfolk and Western, PWV and Mellon Bank handled the 1973 Twilight coal lease
in a similar fashion. By August 1, 1982, PWV’s debt obligations were paid in full, and Mellon
Bank discharged PWV of all debt obligations.
d. Tax & Accounting Changes
In contrast, the indebtedness of Norfolk and Western to PWV grew significantly in
PWV’s favor throughout the 1970’s and 1980’s following changes to tax and accounting laws
that the parties apparently did not anticipate in 1962. The Tax Reform Act of 1976 changed
amortization rules for railroads, which increased the additional (non-cash) rent for PWV under
the Lease.10 The Economic Recovery Tax Act of 1981 likewise allowed new depreciation
deductions of track structure cost, resulting in another increase of the additional (non-cash) rent.
Additionally, the ICC issued an order in 1983 that required railroads to change their accounting
method for track structures, which also affected the Settlement Account.
On May 10, 1985, Norfolk Southern sent to PWV a letter in which it requested direction
and/or agreement in accounting for a deferred credit based on the recent tax and accounting
changes. Norfolk Southern also suggested that PWV discuss the credit with its auditors, Peat,
Marwick, Mitchell & Co. (“Peat Marwick”). On July 29, 1985, Sigmund Levine, PWV’s then-
10. Defendants consistently object to references of “non-cash rent,” as the term appears nowhere in the Lease.
Much like the “Settlement Account,” the parties have historically used the term “non-cash rent” in reference to
Section 4(b) “Additional rent.” See June 18, 1982 Letter from Norfolk Southern, Pls.’ Ex. 163, ECF No. 163 at 1
(“The Internal Revenue agents conducts these [audit] examinations have specifically examined the [L]ease between
NW and PWV and have determined that non-cash rent payments claimed by NW in its tax returns are properly
allowable in the computation of taxable income.”); supra n.6 (Pomeroy Memo, Oct. 8, 1964, Pls.’ Ex. 120, ECF No.
120); see also Report of Gibbons & Kawash, March 24, 2008, Defs.’ Ex. 135 at F-8, ECF No. 204-38 (“Under the
terms of the [L]ease, a noncash [S]ettlement [A]ccount is maintained to record amounts due to or due from Norfolk
Southern upon termination of the [L]ease.”).
21
Secretary – Treasurer, informed Norfolk Southern that PWV agreed with the proposed method of
handling the matter.
e. PWV’s Historical Representations
Over the course of the Lease, PWV has made representations to its shareholders, the ICC,
and SEC regarding the payment of its debt by and receipt of income under the Lease.
i. Shareholders
PWV has consistently represented to its shareholders that the annual cash rental is fixed
at the rate of $915,000. For example, in a November 1969 letter to shareholders recommending
that they approve the acquisition of shopping centers, PWV cited the “fixed cash rent of
$915,000” and noted its need to diversify to counteract the effect of inflation on the purchasing
power of its income. Pls.’ App’x Ex. 71 at D005706, ECF No. 201-71. Minutes from annual
shareholder meeting, such as those in 1977 and 1984, similarly reflect PWV’s position that the
tax and accounting changes did not entitle it to any additional rental because the only cash
income available under the Lease was the fixed amount of $915,000.
In fact, PWV
acknowledged at annual shareholder meetings that Norfolk and Western received the particular
tax benefits under the Lease from the rent and depreciation deductions. PWV also responded to
numerous inquiries from its shareholders in the mid-to-late-1980’s regarding the tax and
accounting changes, explaining that the $915,000 cash rental was the only income available
under the Lease, with PWV shares tantamount to a bond.
ii. Regulatory Bodies
In addition to its shareholders, PWV has made several representations about the terms of
the Lease to the ICC and SEC.
In a March 21, 1967 Return Questionnaire related to its
application for authorization to reorganize into a business trust, PWV stated that, to the extent
22
that Norfolk and Western’s payment of debt exceeded PWV’s tax deductions for depreciation
and amortization, PWV is indebted to Norfolk and Western, but that amount “is payable only out
of income after termination of the [L]ease.” Pls.’ App’x Ex. 79 at 11, ECF No. 201-79.
Almost twenty years after PWV reorganized into a business trust, the SEC received a
complaint from a shareholder who alleged that the Trust was not distributing 90% of its ordinary
taxable income to its shareholders, as it must do to maintain qualified status. After receiving the
complaint sometime in July 1985, the SEC directed PWV to respond with its version of the facts.
Two weeks later, Harder wrote to the SEC on behalf of PWV: “In summary, we have always
paid out all our taxable income which is the cash rental from Norfolk and Western less
expenses.” Pls.’ App’x 169 at D007126, ECF No. 201-169.
More recently, on November 16, 2005, Vice President and Secretary – Treasurer of PWV
Robert A. Hamstead wrote to SEC Branch Chief Daniel Gordon to provide information about the
perpetual nature of the Lease.11
Hamstead’s letter to the SEC noted that PWV’s Audit
Committee, which was comprised of Hamstead as well as trustees Larry Parsons and Virgil
Wenger, spent significant time discussing the terms of the Lease during an October 25, 2005
meeting. At the time, the Audit Committee discussed the timing of payment of the Settlement
Account and whether interest accrued on the balance.
The Audit Committee ultimately
determined that the historical treatment of the Settlement Account was proper and that PWV
should convince the SEC to maintain the “status quo.” Pls.’ App’x Ex. 178 at 1, ECF No. 201178. As Hamstead stated in his letter to the SEC, “[t]he Trustees and Audit Committee believe
11. The SEC had apparently requested that PWV record the Lease without regard to any renewals after the original
99-year term. The information provided to the SEC by Hamstead was consistent with a report authored by Robert
Denyer, the Gibbons & Kawash accountant who served as the director in charge of the PWV account, who
concluded that the Lease should be considered a “capital lease” for accounting purposes. See Pls.’ App’x Ex. 180,
ECF No. 201-180. In the Gibbons & Kawash Report, it also acknowledged that “a noncash settlement account is
maintained to record amounts due to or due from Norfolk Southern upon termination of the lease”—i.e., an
“indeterminate settlement date.” Id. at F-8.
23
there is sufficient penalty upon the Lessee that the [L]ease will be renewed into perpetuity.”
Pls.’ App’x Ex. 179 at 3, ECF No. 201-179.
iii. Annual Reports
The Annual Reports of PWV shed additional light on its historical treatment of the Lease.
In Pittsburgh & West Virginia’s 1962 and 1963 Annual Reports, it indicated that the additional
rental obligation of Norfolk and Western (for depreciation or amortization deducted for federal
income tax purposes) over the term of the Lease would equal approximately the amount of the
indebtedness discharged on behalf of the Lessor.
Under this scheme, the balance of the
Settlement Account would be relatively insignificant at the expiration of the Lease. Pittsburgh &
West Virginia nevertheless changed its outlook in its 1964 Annual Report (the first after the
Lease became effective), predicting that “the additional rental over the term of the Lease would
exceed the amount of indebtedness to be paid by Norfolk and Western.” Pls.’ App’x Ex. 7 at 6,
ECF No. 201-7.
Beginning in 1981, PWV’s Annual Report reflects that the balance of the Settlement
Account swung in its favor. That year, PWV advised its shareholders:
[t]he sole business of the Trust is the collection of rent on the railroad properties
subject to the [L]ease. The rent is fixed at $915,000 per year and is not subject to
change for the life of the [L]ease. The [L]ease also provides that certain
additional amounts be recorded as rent income, although there is no requirement
for payment by Norfolk & Western of such noncash items.
Pls.’ App’s App’x Ex. 24 at 0018206, ECF No. 201-24. As of 1983, PWV no longer included
the value of the Settlement Account in its reports because it would have distorted its financial
picture had it done so. See Pls.’ App’x Ex. 26 at F-7, ECF No. 201-26 (“At December 1, 1983,
the non-cash [S]ettlement [A]ccount had a balance of $3,900,000 receivable from Norfolk and
Western; however, because the account will not be settled until the expiration of the [L]ease, no
24
value has been reported in 1983 for the balance of the account or the transactions affecting the
balance.”).
Moreover, beginning in its 1983 Annual Report and continuing thereafter, PWV has
repeatedly stated that “[f]or financial reporting purposes, only the cash income is reported, as the
non-cash items, although recorded under the terms of the [L]ease, have no financial value
because of the unlimited settlement date.” Id. at 1. PWV has also repeatedly stated in its Annual
Reports (and 10-K’s)—as recently as 2010—that “[a]lthough the [L]ease provides for additional
rentals to be recorded, these amounts do not increase cash flow or net income as they are charged
to [Norfolk Southern’s] [S]ettlement [A]ccount with no requirement for payment except at
termination of the [L]ease.” Pls.’ App’x Ex. 53 at D025370, ECF No. 201-53.
From 1983 through 2010, PWV made no mention in its Annual Reports of a limit on the
size of the Settlement Account. As the 1983 Annual Report reflects, all of PWV’s third-party
debt assumed by Norfolk and Western had been paid off in 1982.
5. PWV’s (New) Management12
Herbert Jones, III (“Mr. Jones III”) served as PWV’s President from 2005 until early
2011 and as a member of its Board of Trustees from 2004 through 2011. During his tenure,
PWV never hired a law firm, but it continued to retain Gibbons & Kawash as its outside
accountant auditing firm.
From 2004 through early 2011, Larson Parsons served as one of the five PWV trustees as
well as the Chairman and Chief Executive Officer of Wheeling & Lake Erie. PWV’s thenmanagement was fully aware of Parons’ position with Wheeling & Lake Erie when it invited him
12. The parties incorporate by reference their respective Responsive Statement of Material Facts (ECF Nos, 128,
150) filed alongside Power REIT’s motion for summary judgment and the opposition thereto. In its Memorandum
Opinion denying that motion, the Court documented PWV’s 2011 change of management, the rights offering, and
the formation of Power REIT. See Mem. Op. at 6-14, June 19, 2014, ECF No. 186. The Court incorporates that
discussion by reference.
25
to become a trustee. As a PWV trustee, Parsons was a member of its audit committee, which
was responsible for overseeing PWV’s financial affairs. In this capacity, Parsons preferred that
PWV not change its business plan despite modest increases in costs and corresponding decreases
in profits. Moreover, Parsons did not use his position on the Board to alter the longstanding
operations of PWV or otherwise change the way it historically functioned since the
commencement of the Lease. PWV’s Board chose not re-nominate Parsons as a trustee in 2011.
David Lesser became a PWV trustee sometime in 2009 and the Chairman of the Board in
late 2010. Arun Mittal became vice president, treasurer and secretary of PWV in March 2011,
replacing Robert R. McCoy who had resigned that spring. Along with PWV’s new management,
Lesser expressed an interest in “modernizing” the Lease soon after they came onboard.
6. The West End Branch Dispute
Beginning in October 2007, the Pennsylvania Department of Transportation
(“PennDOT”) undertook the construction of a $52.6 million dollar project at the West-End Circle
in Pittsburgh Pennsylvania, an area where PA Route 51, Carson Street, South Main Street, and
Steuben Street all converge. As part of the construction project, PennDOT sought to purchase a
segment of the Rail Line known as the West End Branch, which was no longer essential to
Wheeling & Lake Erie’s operation. As Sublessee, Wheeling & Lake Erie agreed to sell the West
End Branch pursuant to its rights under Section 9 of the Lease. To complete this sale, Wheeling
& Lake Erie was required to obtain the STB’s authority to discontinue service and abandon the
common carrier obligation(s) associated with the West End Branch, which required the
participation of PWV as the owner of the property.
In a December 8, 2010 letter addressed to McCoy, a lawyer representing Wheeling &
Lake Erie before the STB sought a power of attorney from PWV to expedite the process. In a
26
series of correspondences over the next several months, Lesser requested information related to
the sale, declined to execute the power of attorney, and raised concerns about “tax issues” that
could result from the transaction. Wheeling & Lake Erie’s counsel complied with the document
requests.
On March 15, 2011, Lesser sent an e-mail to Wheeling & Lake Erie’s counsel in which
he reiterated that PWV would not execute a power of attorney related to the transaction but that
it would sign documents to effect the transfer so long as Norfolk Southern made the request.13
Lesser also expressed his ongoing concerns with related to the tax treatment of the sale and
advised that PWV had retained counsel to work with its accounting firm on this matter pursuant
to Section 4(b)(6) of the Lease.
On July 7, 2011, PWV ultimately agreed to allow Wheeling & Lake Erie’s counsel to
also represent it in the abandonment process before the STB. The representation was expressly
limited to the “ministerial act” of extinguishing PWV’s common carrier obligation on the West
End Branch. Pls.’ App’x Ex. 274 at D027009, ECF No. 212-25.
7. The Tax Memorandum & Demands for Payment of Attorneys’ Fees
On June 23, 2011, Mittal sent to Randal S. Noe, a General Attorney at Norfolk Southern,
a letter with which he attached a “Tax Memorandum” that outlined alleged issues related to the
proposed sale of the West End Branch. The Tax Memorandum set forth PWV’s position that
Wheeling & Lake Erie’s sale of the West End Branch for approximately $580,000 would require
Norfolk Southern, under Section 4(b)(7) of the Lease, to pay to PWV between $980,000 and
13. Norfolk Southern sent a letter addressed to Lesser on March 28, 2011, directing PWV to immediately execute
and deliver certain documents to Wheeling & Lake Erie in accordance with its obligations under Section 9 of the
Lease: to “execute and deliver such instruments as may be necessary or appropriate to effectuate” certain
transactions. In addition, Norfolk Southern noted that “PWV is of course entitled to investigate the tax treatment of
the proposed sale to PennDOT . . . [b]ut the terms of the Lease do not permit PWV to withhold the [d]ocuments
either while that investigation is pending or as a result of any finding it may produce.” Defs.’ Ex. 45, ECF No. 20246.
27
$2,000,000 (depending on the tax basis in the property) in additional rent in order to compensate
the Trust for capital gains taxes.14 Moreover, the Tax Memorandum outlined PWV’s view that
“the Trust believes that its tax returns were improperly prepared [by Norfolk Southern] and did
not reflect the ordinary taxable income created by NSC’s 4(b)(7) additional rent payments in
prior years.” Defs.’ App’x Ex. 50, ECF No. 202-51. PWV thus proposed an amendment to the
Lease to “eliminate [Norfolk Southern’s] considerable additional rent obligation” and to “reduce
the Trust’s tax burden (and its concerns related to continued REIT qualification as a result of the
[t]ransaction or future transactions).” Id. In closing, PWV once again reiterated its position that
“[it] believes that the Lease needs to be updated . . . .” Id.
Mittal also attached to the June 23, 2011 letter an invoice that totaled $4,487.50 in
attorneys’ fees for services rendered by Peter Anglum and Richard Baumann of Morrison Cohen,
LLP (“Morrison Cohen”) as of March 31, 2011, allegedly “in connection with the review of the
Lease and the tax issues related to the proposed sale.” Defs.’ App’x Ex. 50, ECF No. 202-51.
Mittal submitted that Norfolk Southern was responsible for paying these expenses under Section
4(b)(6) of the Lease, which requires the Lessee to pay PWV’s expenses related to “the doing of
14. In an October 3, 2011 letter to Plaintiffs’ counsel, Mittal characterized these payments as “recursive”:
As we advised NS during the course of many conversations and in writing, the contemplated sale
will generate capital gains for PWV. Pursuant to Section 4(b)(7), NS is required to pay, as
additional rent, PWV’s taxes incurred as a result of the sale. However, each such additional rent
payment from NS creates additional taxable income for PWV and additional rent payment
obligations for NS. We have been advised by both counsel and accountants that the tax
reimbursement provisions of the lease result in the recursive calculation we have described to NS.
Defs.’ App’x Ex. 53, ECF No. 202-54. In their CSMF, Plaintiffs submit that “[a]t some point after the initiation of
this litigation, Defendants abandoned the position that PWV is entitled to the $1.3 million recursive payments set
forth in the Tax Memorandum that it demanded from Norfolk Southern.” Pls.’ CSMF at 66, ¶ 273, ECF No. 200
(citing Dep. of Lesser, Pls.’ App’x Ex. 226 at 51; Dep. of Mittal, Pls.’ App’x Ex. 230 at 148-49). Defendants deny
this fact “as the evidence cited by Plaintiffs does not support this statement” and “based upon Plaintiffs’
mischaracterizations of the cited evidence.” See Defs.’ RSOF at 96, ECF No. 209. A review of the deposition
transcripts supports Plaintiffs’ position. See, e.g., Dep. of Lesser, Pls.’ App’x Ex. 226, ECF No. 201-226 at 51 (“Q.
Does P&WV contend, as you sit here today, that there is a $1.3 million additional rent obligation that’s owed to
P&WV based upon the disposition of the West End Branch? A. I don’t believe that’s the case. Q. You’re not
contending that. A. No.”).
28
all acts and things necessary and desirable for the protection during the existence of this Lease of
Lessor’s rights in the demised property or the rentals or other sums payable pursuant to the
Lease.”15
Norfolk Southern refused to pay the invoice, taking the position that “[t]he claimed
attorneys’ fees related to the evaluation by Morrison & Cohen [ ] of P&WV’s proposal to amend
the Lease” and that “these legal expenses are solely related to the benefit of P&WV’s
stockholders.” Pls.’ App’x Ex. 277 at 3, ECF No. 212-28. On October 3, 2011, PWV reiterated
its request and indicated that it may declare a default unless Norfolk Southern promptly remitted
payment, although it “remain[ed] interested in an amicable resolution of the issues . . . .” Defs.’
App’x Ex. 53 at D024684, ECF No. 202-54. This suit followed.
Plaintiffs commenced this action on December 15, 2011 by filing a Complaint in
Declaratory Judgment in which they sought the Court’s intervention to resolve the disputes over
the terms of the Lease in anticipation of PWV declaring a default and seeking the available
remedies. Prior to this lawsuit, PWV never demanded or asserted that Norfolk Southern owed
any additional rent or “recursive payments” for sales of portions of the Demised Property under
Section 4(b)(7) of the Lease, as the June 23, 2011 Tax Memorandum suggests.
On March 23, 2012, Defendants demanded that Plaintiffs reimburse them for over
$90,000 in legal fees that they had incurred because of this litigation. Plaintiffs once again
denied Plaintiffs’ request for payment. To date, Plaintiffs have not paid the legal fees incurred
by Defendants because of this litigation.
15. PWV claims that the “legal review commenced by PWV led to Norfolk Southern’s admission that it committed
significant accounting errors related to the calculation of indebtedness owed by Norfolk Southern to PWV.” Defs.’
RSOF at 21, ¶ 52, ECF No. 207; see also Defs.’ Br. at 43, ECF No. 197(“But for the mere $4,487.50 in legal fees
incurred, PWV would never have learned about Norfolk Southern’s costly mistakes.”). Those “accounting errors”
were addressed twenty months after Baumann and Anglum rendered their legal services by Norfolk Southern’s
Assistant Vice President, Tax Administration, Michael Cox who testified that, during the course of this litigation,
Norfolk Southern uncovered that it incorrectly reduced the Settlement Account by $69,000 in 2006 and learned of a
mistake in the tax returns for that year. See Pls.’ App’x Ex. 254 at 40-42, ECF No. 212-5.
29
8. The Books and Records Demands
Local counsel for Defendants entered an appearance in this action on January 5, 2012 and
filed a motion to admit out-of-state-counsel pro hac vice the following day. On January 6, 2012,
Defendants also filed a stipulation with the Court regarding an agreed-upon extension of time to
respond to the Complaint.
a. The January 2012 Books and Records Demand
That same day, Mittal wrote a letter to Noe demanding an inspection of the books and
records of Norfolk Southern, as the Lessee, under Section 8(a)(3) of the Lease. The letter
indicated that “[w]e will plan on the inspection taking place at Three Commercial Place, Norfolk,
Virginia, 23510 on [Tuesday] January 11, 2012 starting at 10:00 AM and plan and staying
through the end of the week.” Defs.’ App’x Ex. 68 at 1, ECF No. 202-69. Within two business
days, Defendant(s) sought access to Norfolk Southern’s books and records related to financial
statements and supporting documents; tax returns; a historical accounting of the Settlement
Account, including each addition and subtraction as well as supporting documentation; all details
related to all sales of PWV property and all tax reimbursement payments related thereto; railway
volume metrics; customer lists; track maintenance; track condition reports; machinery,
equipment, supplies, motive power, rolling stock and cash needed to operate the railroad;
property descriptions, plans and specifications; correspondences related to the Lease or PWV;
ICC, STB, and other governmental records; any existing or pending litigation related to the
railroad; and insurance. In addition, PWV stated its intention to perform a track inspection in the
near future.
The January 6, 2012 Books and Records Demand set off an extensive back and forth
between the parties through their counsel of record. On January 9, 2012, Plaintiffs responded to
30
the Books and Record Demand, asserting that “[u]nder no circumstances would Mittal’s requests
be deemed to be ‘reasonable’ under the Lease . . . .” Defs.’ App’x Ex. 71 at 1, ECF No. 203-1.
Plaintiffs maintained that Mittals’s request—apparently the first Books and Records Demand in
the history of the Lease—was an attempt to circumvent the Federal Rules of Civil Procedure in
light of the ongoing litigation.
Plaintiffs thus concluded that “there will be no document
inspection on January 11 as [PWV] has unilaterally and improperly demanded.” Id. at 2.
PWV replied to Plaintiffs’ correspondence on January 11, 2012. In the letter, PWV
reiterated its right under Section 8(a)(3) of the Lease, emphasizing that it could inspect the books
and records of Lessee “for any purpose whatsoever.” PWV also invited Plaintiffs to provide
legal authority to support their position and offered them additional time to gather the books and
records it requested.
Two days later, on January 13, 2012, Plaintiffs sent another letter to PWV regarding
Mittal’s January 6, 2012 Books and Records Demand. Plaintiffs maintained that they would not
produce any of the documents requested outside of this litigation. In support, Plaintiffs cited
Entertainment Technology Corp. v. Walt Disney Imagineering, No. CIV.A. 03-3546, 2003 WL
22519440 (E.D. Pa. Oct. 2, 2003), a decision in which the district court denied a motion for leave
to conduct expedited discovery.16 From Plaintiffs’ perspective, the material sought in Mittal’s
letter was “far more extensive than the singular request denied by the [c]ourt in Entertainment
Technology” and “amounts to an attempt by [PWV] to obtain discovery before responding to the
Complaint and to avoid the mandates of Rule 26.” Defs.’ App’x Ex. 73, ECF No. 203-2.
16. In Entertainment Technology Corp. v. Walt Disney Imagineering, Plaintiff requested leave “to conduct
expedited discovery of, among other requests, the following documents: All documents concerning the testing or
analysis of the safety, functioning or performance of the Ride, including all components of the Ride, whether or not
such testing or analysis was performed by Disney or another person or entity.” No. CIV.A. 03-3546, 2003 WL
22519440, at *1 (E.D. Pa. Oct. 2, 2003).
31
On January 17, 2012, PWV responded to Plaintiffs’ latest position. PWV noted that
Entertainment Technology Corp. did not involve a contractual provision authorizing a Books and
Records inspection, distinguishing it from the parties’ dispute. Further, PWV advised that
“[Plaintiffs’] refusal to provide access to the books and records constitutes a failure to perform
an obligation under the Lease that was properly noticed by P&WV on January 6, 2012.” Defs.’
App’s Ex. 74, ECF No. 203-3.
The next correspondence (in the record) did not occur until February 22, 2012 when
Plaintiffs offered to produce to Defendants “a refined list of documents, both in terms of
categories and in terms of time period relating to the operation of the Lease.” Defs.’ App’s Ex.
75, ECF No. 203-4.
Plaintiffs similarly requested that Defendants produce to them “all
documents in their possession relating to such categories enumerated in the refined list, as well
as such other categories related to the Lease that [they] may designate.” Id.
Notwithstanding this offer, PWV rejected the proposed accommodation in a February 27,
2012 letter. Once again, PWV emphasized that Section 8(a)(3) of the Lease states that a Books
and Records inspection may be “for any purpose whatsoever.”
PWV thus demanded that
Plaintiff(s) make available the Books and Records that Norfolk Southern maintained on behalf of
the Lessor and those documents that related to the condition, maintenance and operation of the
Rail Line. In response to Plaintiffs’ Books and Records request, PWV noted that they may
review the documents at any time and upon reasonable notice irrespective of whether they are on
PWV’s list.
According to PWV, Plaintiffs have not yet produced documents responsive to the January
2012 Books and Records Demand regarding (1) “railway volume in terms of car loadings, tons
transported, revenues and other metrics tracked by Lessee on a per customer and per category
32
basis” or (2) “customer lists including billings/usage.” Defs.’ CSMF at 21-22, ECF No. 202. In
response, Plaintiffs assert that there is no obligation for either party to produce any documents
under Section 8(a)(3) of the Lease, contend that they nevertheless complied with the request
through discovery in this litigation, and allege that Defendants’ new management used the Books
and Records Demand to manufacture a default of the Lease and achieve a windfall by
terminating the Lease and collecting the balance of the Settlement Account. See generally Pls.’
Br. in Opp. at 14, ECF No. 210 (“Needless to say, Plaintiffs’ counsel felt sandbagged by the
inspection demand, particularly because Rule 34 allows 30 days to respond to a request for the
production of documents and Defendants sought documents on only two business days’
notice.”).
b. The March 2013 Books and Records Demand
On August 14, 2012, Defendants served both Norfolk Southern and Wheeling & Lake
Erie with document requests under Federal Rule of Civil Procedure 34. The requests sought
production of all documents and/or communications concerning their financial statements,
PWV’s tax returns and financial statements, other leases of railroad property and related
litigation material, the Settlement Account or other indebtedness between the parties, and sales
of the Demised Property.
Plaintiffs lodged numerous objections in their September 2012
response(s), and it remains unclear whether they produced any documents pursuant to this
discovery request.17
On January 10, 2013, PWV’s current management was contacted by Larry Skrzysowski,
a representative of Chesapeake Appalachia, LLC (“Chesapeake Appalachia”), seeking
17. Around this time, the parties were also litigating a motion to quash the subpoena of C. Howard Capito, a former
PWV trustee and a financial consultant for Wheeling & Lake Erie, in the United States District Court for the Eastern
District of Tennessee. This Court has previously outlined the background of that dispute in two other Memorandum
Opinions. See Mem. Op. at 11-13, July 17, 2013, ECF No. 102; Mem. Op. at 3-6, Aug. 29, 2013, ECF No. 105.
33
ratification of an oil and gas lease it entered into with Wheeling & Lake Erie. Apparently, this
instance was the first time anyone from PWV’s current management team had learned of thirdparty leases related to the Demised Property.
The current management of PWV became aware of other third-party leases during
Parson’s January 29, 2013 deposition. During his deposition, Parsons confirmed that numerous
entities aside from Chesapeake Appalachia have drilled for oil and gas on the Demised Property
pursuant to lease agreements with Wheeling & Lake Erie. Through counsel, PWV thereafter
requested that Plaintiff(s) produce any leases relating to drilling on the Demised Property,
characterizing the extraction of material as tantamount to a sale.
Over the next several days, counsel corresponded with each other regarding why the
third-party agreements were not produced during fact discovery which originally closed on
January 25, 2013.
Plaintiffs took the position that the third-party agreements were not
tantamount to a sale and that they were never requested in discovery. PWV disputed that
account, contending that the third-party agreements were responsive to its requests for
documents relating to financial statements, revenues and sales. After the parties exchanged
several additional letters in which they continued to share their opposing views, PWV made
another demand under Section 8(a)(3) of the Lease.
By letter dated March 5, 2013 from Lesser to Noe, PWV sought to inspect the Books and
Records of Norfolk Southern regarding: any documents and communications that related to any
grant, conveyance or assignment by Norfolk Southern and/or Wheeling & Lake Erie to any third
party of any right or interest in the Demised Property; communications between or among
Plaintiffs and any third party concerning the lease or sublease of any right or interest in the
Demised Property; any leases and/or subleases entered into by Norfolk Southern and/or
34
Wheeling & Lake Erie with third parties relating to property adjacent or proximate to the
Demised Property; subsurface rights relating to the Demised Property; and any revenue or
consideration received by Norfolk Southern and/or Wheeling & Lake Erie from any third party
for the use or occupancy of any portion of the Demised Property. See Defs.’ Ex. 90, ECF No.
203-19. PWV proposed that Norfolk Southern gather this information and produce it by March
20, 2013 or make it available for inspection on March 25, 2013.
On March 11, 2013, Norfolk Southern represented that it had produced to PWV all
documents related to the Lease and Sublease in its possession, meeting its obligations under
Section 8(a)(3) of the Lease. Norfolk Southern further advised that PWV’s “letter appears to
request documentation which, if such documents exist, may be in the possession of W&LE,
please be advised that Mr. Lesser’s letter has been forwarded to W&LE pursuant to W&LE’s
assumption of certain rights and obligations under the Sublease.” Pls.’ App’x Ex. 200, ECF No.
201-200.
Wheeling & Lake Erie ultimately located in storage numerous boxes that contained over
23,000 documents and proposed dates for the demanded in-person inspection to PWV, to which
they suggested other dates due to a scheduling conflict and indicated its preference to have the
documents copied and mailed.18 Some of the documents were files for leases, licenses and
easements that PWV transferred to Norfolk Southern at the commencement of the Lease and that
Norfolk Southern transferred to Wheeling & Lake Erie after they entered into the Sublease.
Other documents were more recent third-party agreements, such as those outlined above.
18. In a March 13, 2013 letter, Wheeling & Lake Erie informed PWV that the documents would be available for
inspection at its offices in Brewster, Ohio on March 21, 28 and/or 29, 2013. Defs.’ App’x Ex. 70, ECF No. 202-71.
On March 15, 2013, PWV proposed April 2, 3, 4, or 5, 2013 as the date(s) for inspection, but stated that “it would be
more efficient if WLE and/or NS would simply send the required information.” Defs.’ App’x Ex. 91, ECF No. 20320. Wheeling & Lake Erie replied on March 21, 2013, advising that it had “decided to scan all the documents which
W&LE located and send them to you as supplement production in the litigation.” Defs.’ App’x Ex. 92, ECF No.
203-21.
35
On April 1 and 3, 2013, Wheeling & Lake Erie sent to PWV photocopies of financial and
accounting records relating to licenses, leases, easements, and subsurface rights. Wheeling &
Lake Erie also produced documents that it uncovered in the process of assembling materials for
the Books and Records Demand and that it identified as responsive to discovery requests made
during this litigation.19
On April 22, 2013, PWV sent to Norfolk Southern a letter in which it requested a “proper
accounting” and access to an alleged database/computer system maintained by Wheeling & Lake
Erie to track sales and/or leasing of the Demised Property. PWV pressed for this inspection to
occur within one week to ten days of its demand at Wheeling & Lake Erie’s office. Another
round of letters/e-mails between counsel soon followed.
On April 25, 2015, Wheeling & Lake Erie noted its objection to the timing of the
inspection and its position that Section 8 does not require the Lessee (or the Sublessee in this
case) to permit unfettered access to its data systems that contain information entirely unrelated to
the Lease. Wheeling & Lake Erie thus asked PWV to provide some specificity regarding its
claim that the April production was incomplete and requested PWV to advise what Lesser sought
to accomplish during a visit to its office.
Later that day, PWV responded to the request for “some level of detail” by asserting that
its recent letters were “clear.” In sum, PWV claimed that it “ha[d] not received Plaintiffs’
accounting records concerning payments made to [them] as a result of these leases, sales and/or
other dispositions of PWV’s property.” Defs.’ App’x Ex. 97, ECF No.203-28. Because the
requests for those documents was made under the Lease, PWV asserted that this issue was
between the entities themselves and suggested that a Wheeling and Lake Erie representative
19. The Court has addressed the parties’ disputes relative to fact discovery in an earlier Memorandum Opinion and
Order in which it denied PWV’s motion for protective order shifting the costs of additional discovery to the
plaintiffs and motion for sanctions. See Mem. Op., Dec. 17, 2013, ECF No. 154.
36
contact Lesser directly so that they can work out the logistics of the inspection without the
involvement of counsel. See id. (“I do not believe it is appropriate or efficient for the lawyers to
be in the middle of this back and forth.”).
Following further communications, counsel continued to discuss this issue with each
other. On May 1, 2013, PWV sent a letter to follow-up on a recent telephone conversation
during which Wheeling & Lake Erie apparently maintained that the pending document request
was “unclear” and that all relevant information had been produced. PWV considered these
positions “disingenuous at best” and notified Wheeling & Lake Erie of Lesser’s efforts to
coordinate the inspection with Michael Mokodean, its Chief Financial Officer. Defs.’ App’x Ex.
98, ECF No. 203-29. Based on PWV’s understanding that Wheeling & Lake Erie did not intend
to comply with the inspection, it declared that Plaintiff(s) once again failed to comply with a
Books and Record Demand in breach of Section 8 of the Lease.
The letters between counsel continued: on May 2, 2013, Wheeling & Lake Erie assured
PWV that it does not maintain its accounting records in such a manner that would allow it to
readily discern transactions regarding only the Demised Property, reiterating its position that the
Lease does not confer PWV with unfettered access to unrelated information. Wheeling & Lake
Erie nevertheless stated that it was evaluating means to isolate information concerning
receivables relative to the Demised Property and that it would provide this information in an
agreeable format fairly soon. Additionally, Wheeling and Lake Erie reemphasized that counsel
should handle all communications related to the Books and Records Demand—a request first
made in an April 29, 2013 letter which Lesser disregarded in his outreach to Mokodean—in light
of PWV pleading a counterclaim over same.
37
As the exchange of letters and e-mails between counsel persisted, PWV viewed Wheeling
& Lake Erie’s efforts as a tacit concession that the Sublessee had the ability to segregate
accounting information relating to the Demised Property and pressed for its immediate
production in no uncertain terms. See Defs.’ App’x Ex. 101 at 1, ECF No. 203-32 (“PWV does
not intend to cut some sort of deal – as your letter implies it must – in order to obtain information
it is entitled to under the terms of the Lease. The accounting information should be provided
expeditiously.”). In the meantime, PWV maintained that there remained a violation of the Lease.
On May 7, 2013, Wheeling & Lake Erie disputed that it “tacitly conceded” its abilities to
segregate accounting information. See also Pls.’ App’x Ex. 239, ECF No. 201-239 (“Moreover,
there is no obligation under the Lease to maintain accounting records in a format acceptable to
Mr. Lesser.”). Once again, Wheeling & Lake Erie explained that it proposed creating some sort
of accounting in an attempt to resolve this issue and stop the exchange between counsel.
Wheeling & Lake Erie also detailed its unsuccessful efforts to solicit input and its apparent
dissatisfaction with the results. See id. (“The only response I get is that Mr. Lesser is ‘entitled’
to an inspection. So it appears that you are unwilling to discuss the matter further. That is
unfortunate.”). PWV responded in kind on May 8, 2013. Later that day, Wheeling & Lake Erie
informed PWV that it “[would] endeavor to create an accounting.” Id.
At present, PWV insists that Plaintiffs continue to withhold information related to the
March 2013 Books and Records Demand and that it never received a complete accounting from
Wheeling & Lake Erie in violation of Section 8(a)(3).
Moreover, PWV also claims that
Plaintiffs’ failure to produce documents or to notify it of certain transactions until December
2013 or January 2014 (i.e. more than sixty days since March 2013) constitutes an incurable
default under the Lease.
38
c. The December 2013 – February 2014 Document Production
On August 29, 2013, this Court granted Defendants’ motion for leave to file a Second
Supplement to Counterclaim, which relate to the third-party agreements that their current
management allegedly did not become aware of until January 2013. Because of this ruling, the
Court ultimately reopened fact discovery and imposed a May 2014 deadline for its completion.
The parties thereafter exchanged several thousand pages of documents. In September
2013, PWV served both Plaintiffs with a Second Request for Production pursuant to Federal
Rule of Civil Procedure 26 and 34, asking for many of the same documents previously sought by
the March 2013 Books and Records Demand. In response, Plaintiff(s) produced over 57,000
pages of documents on no fewer than nine occasions.20 These documents included third-party
agreements entered into by Wheeling & Lake Erie that related to the Demised Property. See
Defs.’ CSMF at 34-41, ECF No. 202 (citing examples of third-party agreements that Wheeling &
Lake Erie produced in December 2013 or January 2014 but that were in its possession in March
2013).
As part of this discovery, Wheeling & Lake Erie also produced four documents that it
created in March 2013 concerning revenues or other consideration it received relating to the
Demised Property, entitled (1) Statement of Earnings for Ohio; (2) Oil & Gas Royalties on the
20. Defendants assert that Plaintiff(s) produced these documents on no less than eighteen dates from December 2,
2010 through August 25, 2014. See Defs.’ CSMF at 33-34, ECF No. 202. However, Defendants’ appendix only
includes nine cover letters from Plaintiffs’ counsel from December 2013 (2), January 2014 (2), February 2014, April
2014, July 2014 (2), and August 2014, see Defs.’ App’x Ex. 105, ECF No. 203-36, as well as a roughly onethousand page subset of the December 2013 – February 2014 production, see Defs.’ App’x Ex. 138, ECF Nos. 20441–204-57. Defendants also maintain that tens of thousands of pages of documents were not produced by Plaintiffs
until January and February 2014 even though counsel assured the Court that they would accomplish this task by the
end of December 2013. See Oral Arg. Tr., Dec. 13, 2013 at 43 (“THE COURT: [Plaintiffs’ counsel’s] going to
assure me in a minute that she'll have those documents to you before the end of this month; isn't she? PLAINTIFFS’
COUNSEL: Yes, Your Honor. We’re hand coping all of the documents.”); see also Mem. Op., Dec. 17, 2013
(discussing alleged discovery abuses by Plaintiffs and denying PWV’s motion for protective order shifting the costs
of additional discovery and its motion for sanctions). For their part, Plaintiffs assert that they produced documents
in January and February as they could get them copied and that the spring and the summer productions were made
pursuant to their continuing duty to supplement and related to third-party agreements that went into effect postproduction as well as an updated Statement of Earnings. See Pls.’ RSOF at 53-54, ECF No. 207.
39
Pittsburgh & West Virginia Railway Company Property; (3) Wheeling & Lake Erie Railway
Statement of Earnings for Pennsylvania and West Virginia; and (4) One Time Payments PWV.
The information contained within these documents was based, in part, on information that
Wheeling & Lake Erie possessed in January 2012 and/or March 2013. According to PWV,
Wheeling & Lake Erie actively concealed this information from disclosure in violation of the
Books and Records Provision of the Lease.21
B. Procedural History
The Court has detailed this litigation’s extensive procedural history in its June 19, 2014
Memorandum Opinion (ECF No. 186 at 15-22) and incorporates that discussion by reference.22
Following that decision, the parties supplemented the record with several additional pleadings to
comply with the Court’s directives: on June 25, 2014, Plaintiffs filed their Amendment to Second
Supplement to Complaint Amending the Prayer for Relief (ECF No. 188); on July 9, 2014,
Defendants filed their Amended Second Supplement to Counterclaims (ECF No. 191); and on
July 21, 2014, Plaintiffs filed their Answer and Affirmative Defenses to Defendants’ Amended
Second Supplement to Counterclaims (ECF No. 194). The parties have since filed cross-motions
for partial summary judgment.
21. PWV alleges that the total earnings to Wheeling & Lake Erie reflected in the production amount to
$6,238,748.38 but that the “accounting” is incomplete, particularly the document entitled One Time Payments PWV.
In that document, PWV contends that the two line items dated “6/22/2012” do not properly reflect $7.6 million in
royalty payments received from Chesapeake but instead states “PWV Portion TBD.” Defs.’ App’x Ex. 112, ECF
No. 203-70 at 0073689. Wheeling & Lake Erie maintains that there was no “willful concealment.” As for the $6
million sum, Wheeling & Lake Erie contends that the earnings statements included proceeds from agreements that
PWV gave to and facilitated for Norfolk and Western, and therefore, PWV was well-aware of the earnings.
Wheeling & Lake Erie further maintains that the “accounting” is not incomplete in light of its practice not to track
certain information, and it disputes that it should have included royalty payments in a document entitled “One Time
Payments,” as there is no requirement under the Lease to do so.
22. The Court filed an Amended Memorandum Opinion on June 24, 2014 (ECF No. 187) to reflect the correct
docket entry of Power REIT’s motion for summary judgment. The Memorandum Opinions are otherwise identical.
40
II. Legal Standard
Summary judgment must be granted when “the movant shows that there is no genuine
dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.
R. Civ. P. 56(a). The movant must identify those portions of the record which demonstrate the
absence of a genuine issue of material fact. See Celotex Corp. v. Catrett, 477 U.S. 317, 322
(1986). A material fact is one “that might affect the outcome of the suit under the governing
law.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). “Factual disputes that are
irrelevant or unnecessary will not be counted.” Id.
To withstand a motion for summary judgment, the nonmoving party must show a genuine
dispute of material fact for trial by citing to particular parts of material in the record. Matsushita
Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586–87 (1986). A dispute about a material
fact is “genuine” only “if the evidence is such that a reasonable jury could return a verdict for the
nonmoving party.” Anderson, 477 U.S. at 248. “[T]he mere existence of some alleged factual
dispute between the parties will not defeat an otherwise properly supported motion for summary
judgment; the requirement is that there be no genuine issue of material fact.” Id. at 247–248.
The parties must support their position by “citing to particular parts of materials in the
record, including depositions, documents, electronically stored information, affidavits or
declarations, stipulations (including those made for purposes of the motion only), admissions,
interrogatory answers, or other materials,” Fed. R. Civ. P. 56(c) (1)(A), or by “showing that the
materials cited do not establish the absence or presence of a genuine dispute, or that an adverse
party cannot produce admissible evidence to support the fact,” Fed. R. Civ. P. 56(c)(1)(B). In
reviewing all of the record evidence submitted, the court must draw all reasonable inferences
therefrom in the light most favorable to the nonmoving party. Matsushita, 475 U.S. at 587.
41
The court is not permitted to weigh evidence or to make credibility determinations at this
stage. Anderson, 477 U.S. at 255. Those functions are for the jury, not the court. Id. The court
is thus limited to deciding whether there are any disputed issues and, if so, whether they are both
genuine and material. Id.
III. Discussion
Plaintiffs move for summary judgment on Declaratory Judgment Counts One, Two, Five,
Six, Seven and Eight and Counterclaims One-Twelve; Defendants move for summary judgment
on their First, Third, Fourth, Fifth, Eighth, Ninth, Tenth, Eleventh, and Twelfth Counterclaims as
well as Counts One, Two, Five, Six, Seven and Eight. The resolution of these counts and
counterclaims turns on the interpretation and construction of the terms of the Lease. The parties
agree that Pennsylvania law controls.
Under Pennsylvania law, “a lease is a contract and ‘is to be interpreted according to
contract principles.’” Huang v. BP Amoco Corp, 271 F.3d 560, 564 (3d Cir. 2001) (quoting
Hutchison v. Sunbeam Coal Corp., 519 A.2d 385, 389 (Pa. 1986)). The “interpretation of a
written agreement is a task to be performed by the court rather than a jury . . . so long as the
words of the contract are clear and unambiguous, or the extrinsic evidence is conclusive.” Am.
Eagle Outfitters v. Lyle & Scott Ltd., 584 F.3d 575, 587 (3d Cir. 2009) (citations omitted). On
the other hand, “[i]f the contract as a whole is susceptible to more than one reading, the
factfinder resolves the matter.” Pacitti v. Macy’s, 193 F.3d 766, 773 (3d Cir. 1999) (citing
Hullett v. Towers, Perrin, Forster & Crosby, Inc., 38 F.3d 107, 111 (3d Cir. 1994)).
“Pennsylvania law on contract interpretation and ambiguity is somewhat complicated; while the
broad principles are clear, it is not a seamless web.” Bohler-Uddeholm Am., Inc. v. Ellwood
Grp., Inc., 247 F.3d 79, 92 (3d Cir. 2001).
42
Be that as it may, “‘[t]he paramount goal of contract interpretation is to determine the
intent of the parties.’” Baldwin v. Univ. of Pittsburgh Med. Ctr., 636 F.3d 69, 75 (3d Cir. 2011)
(quoting Am. Eagle Outfitters v. Lyle & Scott Ltd., 584 F.3d 575, 587 (3d Cir. 2009)).
Pennsylvania contract law begins with the “‘firmly settled’” principle that the “‘the intent of the
parties to a written contract is contained in the writing itself.’” Bohler-Uddeholm Am., Inc., 247
F.3d at 92 (quoting Krizovensky v. Krizovensky, 624 A.2d 638, 642 (Pa. Super. Ct. 1993) (citing
Steuart v. McChesney, 444 A.2d 659 (Pa. 1982))). “The whole instrument must be taken
together in arriving at contractual intent. Courts do not assume that a contract’s language was
chosen carelessly, nor do they assume that the parties were ignorant of the meaning of the
language they employed.” Great Am. Ins. Co. v. Norwin Sch. Dist., 544 F.3d 229, 243 (3d Cir.
2008) (quoting Murphy v. Duquesne Univ. Of The Holy Ghost, 777 A.2d 418, 429 (Pa. 2001)).
“‘When the words are clear and unambiguous,’ the intent of the parties must be determined from
‘the express language of the agreement.’” Am. Eagle Outfitters, 584 F.3d at 587 (quoting
Steuart, 444 A.2d at 661). And “‘[w]here the intention of the parties is clear, there is no need to
resort to extrinsic aids or evidence.”” Bohler-Uddeholm Am., Inc., 247 F.3d at 92 (quoting
Steuart, 444 A.2d at 661).
A court may, however, look outside the “four corners” of the contract and to extrinsic
evidence in determining whether an ambiguity exists.23 See id. (citing Krizovensky, 624 A.2d at
642). “[A] contract ‘will be found ambiguous if, and only if, it is reasonably or fairly susceptible
of different constructions and is capable of being understood in more senses than one and is
obscure in meaning through indefiniteness of expression or has a double meaning.’” Id. at 93
23. As the Court of Appeals has explained, “[a]mbiguity in a contract can be either patent or latent.” BohlerUddeholm Am., Inc. v. Ellwood Grp., Inc., 247 F.3d 79, 93 (3d Cir. 2001). A “patent ambiguity appears on the face
of the instrument,” while “a latent ambiguity arises from extraneous or collateral facts which make the meaning of a
written agreement uncertain although the language thereof, on its face, appears clear and unambiguous.” BohlerUddeholm Am., Inc., 247 F.3d at 93 (citations and quotation marks omitted).
43
(quoting Duquesne Light Co. v. Westinghouse Elec. Corp., 66 F.3d 604, 614 (3d Cir. 1995)). In
contrast, “‘[a] contract is not ambiguous if the court can determine its meaning without any guide
other than a knowledge of the simple facts on which, from the nature of the language in general,
its meaning depends; and a contract is not rendered ambiguous by the mere fact that the parties
do not agree on the proper construction.’” Bohler-Uddeholm Am., Inc., 247 F.3d at 92. To make
this determination, “the court may consider ‘the words of the contract, the alternative meaning
suggested by counsel, and the nature of the objective evidence to be offered in support of that
meaning.’” Id. (quoting Mellon Bank, N.A. v. Aetna Bus. Credit, Inc., 619 F.2d 1001, 1011 (3d
Cir. 1980)).
At the same time, the Supreme Court of Pennsylvania has recognized that the “course of
performance is always relevant in interpreting a writing.” Atl. Richfield Co. v. Razumic, 390
A.2d 736, 741 n.6 (Pa. 1978); see also Pennsylvania Eng’g Corp. v. McGraw-Edison Co., 459
A.2d 329, 332 (Pa. 1983) (“[Plaintiff’s] contention is premised on an erroneous belief that a
writing must be ambiguous in order to justify consideration of the parties’ post-agreement
conduct.”). As the Supreme Court explained, “‘[t]he parties to an agreement know best what
they meant, and their action under it is often the strongest evidence of their meaning.’” Atl.
Richfield Co., 390 A.2d at 741 n.6 (quoting Restatement (Second) of Contracts § 228 cmt. g
(Tent. Draft No. 5, 1970)).24
Our court of appeals has likewise observed that “[a] court always may consider the
course of performance as evidence of the intent of the parties.” In re Old Summit Mfg., LLC, 523
F.3d 134, 137-38 (3d Cir. 2008) (citation omitted); see also Langer v. Monarch Life Ins. Co., 879
F.2d 75, 81 & n.8 (3d Cir. 1989) (“[E]ven if the contract was not patently ambiguous, we would
24. Although the Pennsylvania Supreme Court cites a tentative draft of the Restatement (Second) of Contracts, §
228 appears as § 202 in the Official Text. See Restatement (Second) of Contracts Par. Tables (1981).
44
consider the parties’ course of performance, and in light of that evidence conclude that it is
latently ambiguous as to the party to bear the risk of loss if the insurance was not obtained.”)
(citations omitted). District courts within the Third Circuit have also followed this approach.
See, e.g., U.S. for the Use of Pioneer Const. Co. Inc. v. Pride Enterprises, Inc., No. 3:CV-070994, 2009 WL 4429802, at **6-7 (M.D. Pa. Nov. 27, 2009); Pathmark Stores, Inc. v. Gator
Monument Partners, LLP, No. CIV.A 08-3082, 2009 WL 5184483, at **7-8 (E.D. Pa. Dec. 21,
2009); Giampolo v. Somerset Hosp. Ctr. For Health, Inc., No. CIV. A. 95-133J, 1998 WL
608243, at **11-12 (W.D. Pa. May 29, 1998). Against this backdrop, the Court turns to the
cross-motions for summary judgment.25
A. The Third-Party Agreements
At Count Five of Plaintiffs’ First Amended Complaint, they seek to have this Court
declare that Norfolk Southern is not in default of the Lease due to a variety of transaction it
engaged in with third parties, including the granting of leases for oil and gas or mineral
extraction, the execution of license agreements relating to the Demised Property, the granting of
easements over the Demised Property, and the entry into leases of portions of the Demised
Property; and to declare that Defendants have no rights to the proceeds resulting therefrom.
Defendants’ Eighth Counterclaim seeks to hold Wheeling & Lake Erie liable for conversion only
with regard to the third-party agreements that pertain to the subsurface rights. For the reasons
that follow, the Court concludes that the Lease affords the Lessee (and thus its Sublessee) the
right to enter into, control, and receive the benefits from third-party agreements, including those
agreements that relate to the subsurface.
25. Because of the significant overlap between many (if not most) of the counts and counterclaims, the Court will
address them together where appropriate. The Court must also address several of the counts and counterclaims on
multiple occasions in light of the parties’ style of pleading. See, e.g., First Am. Compl. at 14-15, ECF No. 153
(requesting seven declarations relating to multiple sections of the Lease under the umbrella of a single count for
declaratory judgment).
45
1. The Language of the Lease
The unambiguous language of Section 1 of the Lease sets forth the breadth of Pittsburgh
& West Virginia’s transfer: except for such property specifically excluded by Section 2,
Pittsburgh & West Virginia leased, assigned, transferred and delivered to Norfolk and Western
“all of [its] right, title and interest in and to all its property, real, personal and mixed,
including equipment, machinery, tools, materials and supplies, cash, investments, securities,
claims, intangibles, choses in action, rights (contractual or otherwise), obligations, interests,
leaseholds and franchises, and including without limitation” the railroad and additional
properties described in Schedules A and B. Pls.’ App’x Ex. 1 at 1, ECF No. 201-1 (emphasis
added). Schedule A provides that the Lessor leased, assigned, transferred and delivered to the
Lessee “[a]ll right, title and interest of [the Lessor] in and to any and all land and improvements
or other inherently permanent structures situate thereon which be under, along or adjacent to” the
Rail Line and branch lines. Id. at 24. And Schedule B provides that the Lessor leased, assigned,
transferred and delivered to the Lessee“[a]ll right, title and interest of [the Lessor], whether legal
or equitable, in and to all equipment, machinery, tools, material and supplies, cash, investments,
securities, claims, intangibles, choses in action, rights (contractual or otherwise), interests,
franchises and all other property owned by [the Lessor], excepting real properties listed on
Schedule A hereto and property not demised listed in Section 2.” Id. at 26.
In Section 2, Pittsburgh & West Virginia did not reserve any rights or interests related to
the real property, the coal, oil, gas or mineral estate, or the proceeds of any existing or
anticipated agreements. Pittsburgh & West Virginia instead limited the Nondemised Property to
“[m]otive power and rolling stock” owned by Lessor and “[s]hares of stock issued by Lessor and
held in its treasury” at the commencement of the Lease, “[b]ooks and records of Lessor which
46
are needed by Lessor in order to carry out its obligations under the Lease,” “[r]ights, privileges
and franchises of Lessor requisite for the preservation of its corporate existence and for the
proper performance by it of the terms and provisions of this Lease or of any obligations imposed
by law,” and “[a]fter-acquired property acquired by Lessor with the proceeds of the rent paid or
payable by Lessee” pursuant to Section 4(a).”26 Id. at 2.
When read as a whole, the Lease also indicates that the original parties intended the broad
transfer to include the ability to control all aspects of the Demised Property. For example,
Section 6 requires the Lessee to “maintain, manage and operate” the Demised Property and to
indemnify Lessor for claims in connection with “the leasing of the [D]emised [P]roperty, the title
to the [D]emised [P]roperty, the condition of the [D]emised [P]roperty, or the use of or
operations over the [D]emised [P]roperty.” Id. at 7. In addition, Section 8(b)(4) requires the
Lessor, when requested by Lessee, to “modify, extend, terminate, abandon or surrender any
existing leases, agency, trackage or other contracts or agreements made by Lessor or any of its
predecessors in title, or enter into any such new agreements, whenever in the judgment of Lessee
such modification, extension, termination, abandonment, surrender or making of a new
agreement would be beneficial to Lessee . . . .” Id. at 13.
At the same time, however, Section 11 requires that, at the end of the Lease, whether
upon termination by expiration or by default, “the [D]emised [P]roperty, or such portion thereof
as shall remain . . . shall be returned to Lessor in the same condition as it is in at the
commencement of the term of this Lease, reasonable wear and tear excepted . . . .” Id. at 14.
Even so, the parties’ undisputed course of performance over fifty years illustrates the parties’
26. The parties’ course of performance is not inconsistent with Plaintiffs’ position that “[t]he items specifically
reserved were limited to only those things necessary to [a]ffect P&WV’s intention to continue its existence as the
annual collector of $915,000 in cash rent.” Pls.’ Br. at 6-7, ECF No. 199.
47
intent to transfer surface and subsurface rights without restriction and resolves any ambiguity in
their agreement.
2. The Parties’ Course of Performance
Beginning eight days before the commencement of the Lease, Pomeroy (acting as general
counsel of Pittsburgh & West Virginia) acknowledged that the Lessor would have to transfer
various agreements to Norfolk and Western and modify or enter into leases or agreements upon
the request of the Lessee under Section 8(b)(4) of the Lease. The transfer included the 1947
license agreement between Pittsburgh & West Virginia and West Penn; the 1951 license
agreement between Pittsburgh & West Virginia and Manufacturers; the 1919 land lease between
Pittsburgh & West Virginia and Monongahela Southern; and the 1942 oil and gas lease originally
between the Wells and Rankin, which Pittsburgh & West Virginia later acquired.
Moreover, in the 1966 Notice of Transfer of the Wells’ oil and gas lease executed by
Pittsburgh & West Virginia, it expressly represented that it leased certain parcels of land to
Norfolk and Western “reserving nothing, including all [its] right, title and interest in and to the
oil and gas underlying the premises conveyed and the rentals, royalties or other income and
benefits arising from same . . . .” Pls.’ App’x Ex. 97, ECF No. 201-97 at 3. PWV also
acknowledged the transfer of its subsurface estate, without claiming any right to receive rental,
royalties or other income therefrom, in its execution of the coal lease between Norfolk and
Western and Twilight in 1974 and in its response to Questa’s inquiry regarding leasing acreage
for oil and gas exploration in 1987.
Aside from those transactions that Pittsburgh & West Virginia/PWV facilitated, the
Lessor became aware of other third-party agreements relating to the subsurface of the Demised
Property, such as Norfolk & Western’s coal lease with Y&O in 1981. At that time, the Lessee
48
advised PWV that “[a]ny proceeds received by NW as a result of the proposed lease should be
subject to the P&WV First Mortgage.” Pls.’ App’x Ex. 156 at 1, ECF No. 201-156. Once again,
PWV claimed no interest in the subsurface rights or the income generated from the lease.
In fact, there is no record evidence that, during the fifty-year history of the Lease,
Pittsburgh & West Virginia/PWV ever disputed that the Lease provides Plaintiffs with the right
to enter into these third-party agreements. Nor has Pittsburgh & West Virginia/PWV ever (until
now) sought payment for, claimed any interest in, or contested the (Sub)-Lessee(s) exclusive
entitlement to the benefits generated by a third-party agreement. The parties’ undisputed course
of performance instead demonstrates that Pittsburgh & West Virginia acknowledged that it had
transferred to Norfolk and Western all right, title, and interest in the Demised Property, including
the subsurface rights and the coal, oil, gas, and mineral estate.
3. Pennsylvania Law
Notwithstanding the broad language of the Lease and the parties’ extensive course of
performance, Defendants espouse the position that, because the parties’ agreement does not
explicitly convey the subsurface interests, the (Sub)-Lessee(s) had no right to enter into the thirdparty agreements relating to the oil and gas, coal or minerals underlying the Demised Property.27
Relying on their interpretation of Pennsylvania law, Defendants contend that a lease, unlike a
deed, “only grant[s] rights that are explicitly enumerated to be part of the demised premises. In
other words, if subsurface rights are not specifically granted in a lease, they remain the lessor’s
rights.” Defs.’ Br. in Opp. at 63, ECF No. 213 (citing Trustees of Proprietors of Kingston v.
Lehigh Valley Coal Co., 84 A. 820 (Pa. 1912)); see also Defs.’ Br. at 66, ECF No. 197 (“[W]hen
27. Defendants do not assert that the interests related to the other third-party agreements—the licenses, easements,
and land leases—fall within one of the five enumerated exceptions in Section 2 of the Lease. Defendants instead
argue that Plaintiff did not properly account for the income generated from those agreements. The Court will
address this issue below.
49
a deed (rather than a lease) grants all rights in real property, such grant includes the subsurface
rights (if they were held by grantor), even when not explicitly enumerated.”) (emphasis in
original). According to Defendants, the Supreme Court of Pennsylvania’s decision in Trustees of
Proprietors of Kingston is the “controlling precedent” on this issue. See Defs.’ Reply at 336,
ECF No. 221.
In Trustees of Proprietors of Kingston, the Supreme Court reviewed, in an equity
proceeding, the findings of the trial judge who held that a sixty-year-old lease (the “Bennett
lease”) with the operative words “demise, set and to farm let” was for “agricultural purposes
only, and conferred no authority on the lessee to mine and remove coal from the premises, or to
use the passageways resulting from the removal of the coal.” 84 A. at 820-21. The Court
ultimately affirmed the decree, observing that the issue was not preserved for appeal. See id.
820-21. But the Court continued to “suggest[ ] in passing” that the tenant was “impeachable for
waste.” Id. at 821. In doing so, the Court discussed Griffin v. Fellows, 81 1/2 Pa. 114, 114
(1873), which “held that the defendant was not impeachable for waste in opening and working
coal and stone mines, on the distinct ground that the estate of the lessee was enlarged by the
words above quoted, used in the habendum, which, in a deed, determines what estate is granted.”
84 A. at 821.
The Supreme Court also observed that, in Griffin, it “further held that its
interpretation of the lease was sustained by the fact that the lessee had for more than half a
century operated the mines with the knowledge of the lessors, who had regularly received the
stipulated rent.” Id. Applying that decision “to the case at bar,” the Supreme Court indicated
that both the language of the agreement and the parties’ course of performance must be
considered in interpreting the lease. See id. at 821-22 (“[T]he operative words in the lease are
simply ‘demise, set and to farm let,’ without any words in any part of the lease referring to the
50
minerals, which were never opened on the premises. For 60 years immediately subsequent to the
letting, the parties had treated the lease as one for agricultural purposes only.”).
Distilled to its essence, the rule thus remains the same whether the instrument is a lease
or a deed: the parties’ intent remains the focus when interpreting their agreement. And here, the
unambiguous language of the Lease along with the fifty-year course of performance make clear
that Pittsburgh & West Virginia transferred to Norfolk and Western all right, title, and interest in
the Demised Property (including the subsurface rights), ceased all business operations, and
sought to only collect the cash rental under the Lease. The Court will not now rewrite the terms
of the Lease to make it seem more reasonable to the Defendant(s) or ignore the parties’
undisputed course of performance to avoid an unwelcome result.
Accordingly, the Court will GRANT Plaintiffs’ motion for summary judgment as to
Count Five (to the extent it concerns the third-party agreements) and as to the Eighth
Counterclaim; and it will DENY Defendants’ motion for summary judgment regarding same.
B. Indebtedness
At Count Five, Plaintiffs seek to have this Court declare that Norfolk Southern has met its
obligations to provide an accounting of the balance of the indebtedness arising under the Lease
and that the 5% cap in Section 16(a) only applies to PWV’s preexisting debt obligations. At
Count Eight, Plaintiffs seek to have this Court declare that that Norfolk Southern is not in default
of the Lease for failing to pay PWV $341,768 in additional rent as demanded on April 7, 2013,
that any amounts accrued under the Settlement Account are not due until termination of the
Lease, and that no interest is due on the amounts accounted for in the Settlement Account.
Defendants’ Third Counterclaim seeks a declaration that the amount of indebtedness
reflected in the Settlement Account cannot exceed 5% of the value of PWV’s assets, that the
51
Settlement Account balance is not indefinite in duration, that the gross proceeds from Asset
Sales in 2006, 2007 and 2011 are properly treated as short-term debt due on demand; and that
these transactions accrue interest consistent with the alternate federal rate (“AFR”); their Fifth
Counterclaim seeks to hold Norfolk Southern liable for breach of contract based on its alleged
failure to provide notice of, account for, and/or track as indebtedness the proceeds from licenses,
easements, and leases, which they consider to be “dispositions” under Section 9;28 their Sixth
Counterclaim seeks to hold Norfolk Southern liable for breach of contract because, in their view,
the proceeds from those third-party agreements should have been paid to PWV in cash since at
least 1983, when the 5% cap on the Settlement Account under Section 16(a) was surpassed; their
Seventh Counterclaim seeks to hold Norfolk Southern liable for fraud regarding its alleged
misrepresentations of the balance of the Settlement Account to PWV; and their Eleventh and
Twelfth Counterclaims seek this Court, respectively, to declare that Norfolk Southern is in
default under Section 4(b)(1) of the Lease and to hold Norfolk Southern liable for breach of
contract for failing to pay PWV $341,768 in additional rent for the year 2012.
For the reasons that follow, the Court concludes that the licenses, easements, and leases
are not “dispositions” under Section 9 of the Lease; that the 5% cap on the balance of
indebtedness is no longer applicable; that Norfolk Southern neither breached the Lease nor
defrauded PWV in connection with its treatment of the Settlement Account or its obligations to
provide statements related to the balance of indebtedness; that Norfolk Southern is not in default
for failing to pay $341,768 in additional rent for 2012; that the balance of the Settlement
28. At Counterclaim Five, Defendants aver a breach of the implied duty of good faith and fair dealing. See Second
Suppl. to Countercls. at 39-40, ECF No. 106. The Court notes that “under Pennsylvania law, a ‘claim for breach of
the implied covenant of good faith and fair dealing is subsumed in a breach of contract claim.’” Burton v. Teleflex
Inc., 707 F.3d 417, 432 (3d Cir. 2013) (quoting LSI Title Agency, Inc. v. Evaluation Servs., Inc., 951 A.2d 384, 392
(Pa. Super. Ct. 2008)). “Therefore, while Pennsylvania law generally recognizes a duty of good faith in the
performance of contracts, this duty ‘does not create independent substantive rights.’” Id. (quoting Com. v. BASF
Corp., No. 3127, 2001 WL 1807788, at *12 (Pa. Com. Pl. Mar. 15, 2001)).
52
Account is not due until the termination of the Lease; and that interest is not due on the amounts
accounted for in the Settlement Account.
1. Section 9
Section 9 of the Lease includes a relevant distinction: the first sentence provides that
“[s]uch demised property as shall not in the opinion of Lessee be necessary or useful may be
sold, leased or otherwise disposed of by Lessee,” provided that “such sales, leases, or other
dispositions” are made in compliance with Lessor’s mortgages or other related agreement(s);
however, the second sentence requires that only “[t]he proceeds of sale, condemnation, or other
disposition of the demised property of Lessor shall, subject to the provisions of any mortgage or
other agreement relating to such property, be paid to Lessee and shall be indebtedness of Lessee
to Lessor.” Pls.’ App’x Ex. 1 at 11-12, ECF No. 201-1 (emphasis added).29 In addition, the third
sentence of Section 9 provides that “Lessee shall also be indebted to Lessor for the salvage value
of demised property upon its retirement or abandonment or other disposition or use to the extent
that salvage value thereof is not included in the proceeds referred to in the preceding sentence.”
Id.
The Court finds that the contractual text supports the interpretation offered by Plaintiffs:
under Section 9, the only “dispositions” that must be tracked as indebtedness are fee simple
conveyances of title to a portion of the Demised Property—e.g., outright sales, condemnations,
or abandonments—rather than the licenses, easements, and leases at issue in this case.30 The first
29. Although this distinction appears at first blush to be sloppy draftsmanship, the parties do not contend and the
Court does not find that it is the result of a scrivener’s error. See generally Int’l Union of Elec., Elec., Salaried,
Mach. & Furniture Workers, AFL-CIO v. Murata Erie N. Am., Inc., 980 F.2d 889, 907 (3d Cir. 1992) (citations
omitted). Moreover, there is no evidence of record that is “‘clear, precise, convincing and of the most satisfactory
character’ that a mistake has occurred and that the mistake does not reflect the intent of the parties.” Id. (quoting In
re Estate of Duncan, 232 A.2d 717, 720 (Pa. 1967)).
30. The explanation offered by Plaintiffs as to why “[t]he cash received from these third-party agreements was
transferred to Norfolk and Western under the Lease” was “so it could be used to address the operational
53
sentence of Section 9 specifically includes “leases” and sets forth the discretionary authority of
the Lessee to sell, lease, or otherwise dispose of the Demised Property. But there is no mention
of “leases” in the remainder of Section 9. The second sentence instead requires that the proceeds
of any sale, condemnation, or other disposition of the Demised Property shall be an indebtedness
of Lessee to Lessor. The third sentence is no different. It requires that the Lessee shall be
indebted to Lessor for the salvage value of the Demised Property upon its retirement,
abandonment, or other disposition or use to the extent that the salvage value is not included in
the proceeds referred to in the second sentence. Nowhere does Section 9 require that proceed(s)
from leases or other non-possessory interests in the Demised Property be an indebtedness of
Lessee to Lessor. The intent of the original parties is thus apparent: the licenses, easements, and
leases at issue are not Section 9 dispositions.
The parties’ course of performance supports this interpretation. For at least thirty years,
Norfolk and Western/Norfolk Southern assisted with the preparation of PWV’s tax returns and
financial statements, and in doing so, represented the balance of the Settlement Account on an
annual basis. None of the representations reflected the income received from the third-party
agreements. Until now, PWV never disputed the representations of the Settlement Account’s
balance, even though it transferred to Norfolk and Western the third-party agreements that
predated the Lease, assisted Norfolk and Western/Norfolk Southern with the execution of new
third-party agreements, and knew that the Lessee received the proceeds from the third-party
agreements. As Plaintiffs highlight, those proceeds included the $5,000 paid to Norfolk and
Western by the Board of Education for the easement that PWV facilitated, the royalty payments
inconvenience and expense of potential interference, as well as to administer these arrangements indigenous to the
rail line’s usage since 1964.” Pls.’ Br. at 50, ECF No. 199; see also id. (“As operators of the rail line, Plaintiffs
obligated themselves under the Lease for all related expenses from all sources, including expenses resulting from
shutdowns and stoppages from licenses, easements, and leases.”).
54
from the Y&O coal lease and Peoples oil and gas lease, and the income from land leases entered
into for erecting and maintaining billboards, a type of third-party agreement that Defendants’
current management was well-aware of in May 2010 when it discussed the Larson proposal.
Defendants also rely on the parties’ course of performance to support their position that
the Lessee relied on Section 9 for certain “dispositions.” First, Defendants cite the Secretary’s
Certificates or resolutions for sales of or easements over the Demised Property prepared by
Norfolk and Western. See Defs.’ Br. at 72-73, ECF No. 197 (citing Defs.’ CSMF at 49-50, ECF
No. 202 (citing Defs.’ App’x Exs. 119-125, ECF Nos. 204-21–27)). However, those documents
do not prove that a lease is a disposition for which Norfolk Southern must account. They only
reference the first sentence of Section 9 to reflect the discretionary power of the Lessee to sell,
lease, or otherwise dispose of the Demised Property, reciting that a said parcel is neither
necessary nor useful to Norfolk and Western or that the conveyance would not impair or in any
manner interfere with its operation. Second, Defendants rely on a 1979 letter from a Norfolk and
Western representative regarding a proposed coal lease. See id. (citing Defs.’ CSMF at 49-50,
ECF No. 202 (citing Defs.’ App’x Ex. 137, ECF Nos. 204-40)). But that letter also does not
support Defendants’ position; it reiterates that “[t]he proceeds of sale must be paid to P&WVA
or reflected as indebtedness of NW to P&WVA, subject to any applicable mortgage provisions”
and recommends that the parties’ execute a mining lease rather than a conditional sale. Id.
Finally, Defendants highlight a line item from PWV’s 1974 Annual Report which reflects that it
received roughly $13,000 in coal royalties that year, as well as a portion of Noe’s deposition in
which he apparently admits that coal royalties serve to increase the Settlement Account. See
Pls.’ App’x Ex. 17 at 006645, ECF No. 201-17; Defs.’ App’x Ex. 57 at 166-68, ECF No. 202-58.
A review of that deposition transcript reveals, however, that Noe only testified that it appeared a
55
coal royalty was credited as income in the Settlement Account that year and that he did not know
enough about the royalty to state whether it was consistent with the terms of the Lease. Thus, the
parties’ course of performance is not “in conflict” as Defendants suggest.
In sum, the language of the Lease, along with the parties’ course of performance,
demonstrates that the third-party agreements are not Section 9 “dispositions” that must be
tracked as indebtedness. Accordingly, the Court will GRANT Plaintiffs’ motion for summary
judgment as to Count Five of the First Amended Complaint and Defendants’ Fifth Counterclaim
to the that extent those claims concern the tracking of proceeds of third-party agreements as
indebtedness; and it will DENY Defendants’ motion for summary judgment regarding same.
2. The 5% Cap
Section 16(a) provides, in relevant part, that “the total of such indebtedness owing from
Lessee to Lessor . . . shall not exceed at any time an amount equal to 5% of the value at such
time of the total assets of Lessor as long as any of the obligations of Lessor which have been
assumed by Lessee in this Lease remain outstanding and unpaid.” Pls.’ App’x Ex. 1 at 17,
ECF No. 201-1 (emphasis added). The parties disagree on whether the “5% cap” on the balance
of indebtedness still applies.
Plaintiffs take the position that the 5% cap was only to apply to the Lessee’s agreement to
pay or discharge on behalf of Lessor the debt obligations existing prior to the date of the Lease in
accordance with Section 7, and therefore, it no longer applies because the PWV debt assumed by
Norfolk and Western has been paid off since 1982. Defendants submit that the 5% cap remains
operative because Norfolk Southern still has outstanding and ongoing obligations which it has
assumed on PWV’s behalf, including the payment of property taxes related to the Demised
Property and the operation of the Rail Line. According to Defendants, the $16,660,850.63
56
balance of the Settlement Account balance exceeds the cap of $457,5000, or 5% of PWV’s asset
value of $9,150,000.
The “obligations of Lessor which have been assumed by Lessee” is undefined in the
Lease, but the language that follows indicates that it refers to the debt obligations of PWV
assumed by Norfolk and Western. The term “as long as” suggests a temporal limitation; if the
5% cap encompassed, for example, Norfolk Southern’s assumption of the operation of the Rail
Line, the language would be rendered superfluous. The plain meaning of “outstanding” and
“unpaid” also supports Norfolk Southern’s interpretation. See BLACK’S LAW DICTIONARY 1213
(9th ed. 2009) (defining “outstanding” as 1. Unpaid; uncollected . 2.
Publicly issued and sold .). And the sentence that immediately follows the
5% cap in Section 16(a) impliedly references the Lessee’s obligations under Section 7: “All cash
payments made by Lessee to Lessor as provided in this subdivision (a) shall immediately be used
by Lessor to pay and discharge indebtedness of Lessor to others as may be designated by
Lessee.” Pls.’ App’x Ex. 1 at 17, ECF No. 201-1. In sum, the parties’ intent as expressed in the
Lease favors Norfolk Southern.
Aside from the language of Section 16, the parties’ course of performance is once again
relevant in interpreting the Lease. As outlined above, the Annual Reports of PWV reflect that it
no longer reported the balance of the Settlement Account beginning in 1983, the year after its
debt obligations became satisfied in full, because it would have distorted its financial picture had
it done so. Moreover, PWV has since repeatedly stated that it would not report the value of the
Settlement Account in light of the indefinite settlement date at the expiration of the Lease. See,
e.g., Pls.’ App’x Ex. 26 at F-7, ECF No. 201-26 (“At December 1, 1983, the non-cash
[S]ettlement [A]ccount had a balance of $3,900,000 receivable from Norfolk and Western;
57
however, because the account will not be settled until the expiration of the [L]ease, no value has
been reported in 1983 for the balance of the account or the transactions affecting the balance.”).
Thus, Norfolk Southern has not been in default of Section 16(a) for the past thirty-one years
because once Norfolk and Western paid off PWV’s third-party debt in 1982, the 5% cap was no
longer effective.
Accordingly, the Court will GRANT Plaintiffs’ motion for summary judgment as to
Count Five and the Third and Sixth Counterclaims to the extent that those claims concern the 5%
cap and payment under Section 16(a); and it will DENY Defendants’ motion for summary
judgment as to Count Five and the Third Counterclaim regarding same.
3. The Reporting of the Settlement Account
Section 16(b) requires that “[f]rom time to time a balance of the indebtedness arising
under this Lease of Lessor to Lessee and of Lessee to Lessor shall be determined.” Pls.’ App’x
Ex. 1 at 17, ECF No. 201-1. The parties have historically used the Settlement Account as an
accounting mechanism for tracking indebtedness pursuant to Sections 4(b)(1)-(4), Section 6,
Section 7, Section 9 and Section 16(a) of the Lease.
a. Breach of Contract
Count Five of the First Amended Complaint and Defendants’ Fifth Counterclaim both
include allegations regarding the (in)-accuracy of Plaintiffs’ reporting of the balance of the
Settlement Account. Because the third-party agreements are not Section 9 dispositions and the
5% cap no longer applies, as explained above, Norfolk Southern has not underreported the
Settlement Account, and therefore, it has not breached the Lease as alleged in Defendants’ Fifth
Counterclaim. Norfolk Southern has thus met these obligations under the Lease. Accordingly,
the Court will GRANT Plaintiffs’ motion for summary judgment as to Plaintiffs’ Count Five of
58
the First Amended Complaint and Defendants’ Fifth Counterclaim to the extent they concern the
reporting of the balance of the Settlement Account; and it will DENY Defendants’ motion for
summary judgment regarding same.
b. Fraud
Defendants’ Seventh Counterclaim asserts a similar fraud claim, arising from the alleged
failure to report the Settlement Account balance. In Pennsylvania, a party must establish the
following elements to sustain a common law fraud claim: “(1) a representation; (2) which is
material to the transaction at hand; (3) made falsely, with knowledge of its falsity or recklessness
as to whether it is true or false; (4) with the intent of misleading another into relying on it; (5)
justifiable reliance on the misrepresentation; and (6) the resulting injury was proximately caused
by the reliance.” Gibbs v. Ernst, 647 A.2d 882, 889 (Pa. 1994). The parties disagree on whether
Defendants have articulated any misrepresentation or the intent to mislead by Norfolk Southern.
In the alternative, Norfolk Southern argues that the gist of the action doctrine bars the fraud
claim. As the Court has already explained, Norfolk Southern has not misrepresented the balance
of the Settlement Account. Even so, the Court will address the alternative arguments of the
parties.
Until recently, the Supreme Court of Pennsylvania “had scant occasion to opine as to
how the gist of the action doctrine should be employed to ensure that a party does not bring a tort
claim for what is, in actuality, a claim for a breach of contract.” Bruno v. Erie Ins. Co., 106 A.3d
48, 60 (Pa. 2014). However, in Bruno v. Erie Insurance Company, the Court discussed the
doctrine at length and observed that “[it] has consistently regarded the nature of the duty alleged
to have been breached, as established by the underlying averments supporting the claim in a
59
plaintiff's complaint, to be the critical determinative factor in determining whether the claim is
truly one in tort, or for breach of contract.” Id. at 68. As the Court explained:
In this regard, the substance of the allegations comprising a claim in a plaintiff’s
complaint are of paramount importance, and, thus, the mere labeling by the
plaintiff of a claim as being in tort, e.g., for negligence, is not controlling. If the
facts of a particular claim establish that the duty breached is one created by the
parties by the terms of their contract—i.e., a specific promise to do something that
a party would not ordinarily have been obligated to do but for the existence of the
contract—then the claim is to be viewed as one for breach of contract. If,
however, the facts establish that the claim involves the defendant’s violation of a
broader social duty owed to all individuals, which is imposed by the law of torts
and, hence, exists regardless of the contract, then it must be regarded as a tort.
Id. (internal citations omitted). The Pennsylvania Supreme Court thus reaffirmed the “dutybased demarcation” as “the touchstone standard for ascertaining the true gist or gravamen of a
claim pled by a plaintiff in a civil complaint.” Id. at 69. Accordingly, this Court must ask
“whether the nature of the duty upon which the breach of contract claims rest is the same as that
which forms the basis of the tort claim[ ].” Id. at 69 n.17.
Upon review of the fraud counterclaim, the Court finds that it arose in the course of the
parties’ contractual relationship and concerns Norfolk Southern’s alleged violation of the
Lessee’s commitment(s) under the Lease to report the balance of the Settlement Account. As the
pleading states, “[u]pon information and belief, in breach of the Lease, Norfolk Southern has
intentionally omitted numerous dispositions of P&WV’s property required under the Disposition
of Property Provision of the Lease when representing the amount of the Settlement Account
and/or indebtedness to P&WV on a yearly basis.” Second Suppl. to Countercls. at 41, ECF No.
106. Defendants’ theory that the fraud counterclaim “is not based on a separate breach of the
Lease,” but on “Norfolk Southern’s false, extra-contractual annual representations concerning
the Settlement Account balance” is thus misplaced. Defs.’ Br. in Opp. at 55, ECF No. 213. In
fact, Defendants’ fraud counterclaim is nothing more than a restatement of its breach of contract
60
counterclaim(s), and therefore, the Court concludes that Defendants’ fraud counterclaim against
Norfolk Southern is barred by the gist of the action doctrine. Accordingly, the Court will
GRANT Plaintiffs’ motion for summary judgment as to Defendants’ Seventh Counterclaim.31
4. Section 4(b)(1) Additional Rent
Under Section 4(b)(1) of the Lease, additional rent owed by Norfolk Southern to PWV
includes “[s]ums equal to the deduction for depreciation or amortization with respect to the
demised property allowed to Lessor for such year under the provisions of the then effective
United States Internal Revenue Code.” See Pls.’ App’x Ex. 1 at 4, ECF No. 201-1. On February
15, 2013, Norfolk Southern represented to PWV that the amount of depreciation and
amortization on PWV’s tax returns for the year 2012 was $341,768. Through a series of
correspondences that followed, PWV demanded and Norfolk Southern refused payment of that
amount in cash.
Section 16(a) provides the Lessee with a choice regarding the “[t]he portion of the
additional rent, or any part thereof, payable to Lessor” pursuant to Sections 4(b)(1)-(4) and
Section 9: to either (1) pay PWV in cash—in which case it must use that cash to pay down its
debt obligations; or (2) credit PWV with the same as indebtedness in the Settlement Account. Id.
at 17. The indebtedness option is, of course, subject to the 5% cap as long as the assumed
obligations remain outstanding and unpaid. As the Court has explained, that limitation no longer
applies because the assumed obligations had previously been paid by Norfolk and Western.
Therefore, Norfolk Southern is not required to make cash payments under Section 16(a) and may
31. Because the Court does not find that Norfolk Southern committed fraud, it will not impose a constructive trust
as requested by Defendants in their Seventh Counterclaim. See Second Suppl. to Countercls. at 42, ECF No. 106;
see generally Louis Dolente & Sons v. U.S. Fid. & Guar. Corp., 252 F. Supp. 2d 178, 182 (E.D. Pa. 2003) (“Courts
will impose a constructive trust only where the defendant has acquired the property at issue as a result of fraud,
duress, undue influence, mistake, abuse of a confidential relationship, or other such circumstances suggesting unjust
enrichment.”) (citations omitted).
61
elect (as it has) to track the $341,768 in Section 4(b)(1) rentals for 2012 in the Settlement
Account without defaulting on its obligations under the Lease.
Accordingly, the Court will GRANT Plaintiffs’ motion for summary judgment as to
Count Eight to the extent it concerns to the payment of additional rent and as to Defendants’
Eleventh and Twelfth Counterclaims; and it will DENY Defendants’ motion for summary
judgment regarding same.
5. Payment of the Balance of the Settlement Account
The Lease is silent on when the Lessee must pay the balance of the indebtedness credited
to the Lessor and tracked under their agreement.
Nevertheless, the parties’ course of
performance demonstrates that they intended for the balance of indebtedness to not be due until
the termination of the Lease.
Until recently, PWV had accepted and acknowledged this aspect of the Lease time and
time again. The record is replete with examples. See supra Part I.A.4.e. For example, PWV has
represented to the ICC that, to the extent Norfolk and Western’s payment of debt exceeded
PWV’s tax deductions for depreciation and amortization, PWV is indebted to Norfolk and
Western, but that amount “is payable only out of income after termination of the [L]ease.” Pls.’
App’x Ex. 79 at 11, ECF No. 201-79. It has also advised its shareholders in Annual Reports (as
recently as 2010) that the Settlement Account would not be paid until the expiration of the Lease.
See, e.g., Pls.’ App’x Ex. 53 at D025370, ECF No. 201-53 (“Although the [L]ease provides for
additional rentals to be recorded, these amount do not increase cash flow or net income as they
are charged to NSC’s settlement account with no requirement for payment except at termination
of the [L]ease. Because of the indeterminate settlement date for these items, such transactions
and balances have not been reported in the financial statements since 1982.”). And PWV’s own
62
Audit Committee (as well as its accounting firm) has recognized the historical treatment of the
Settlement Account and the indeterminate date of payment. See Pls.’ App’x Ex. 178 at 1, ECF
No. 201-178; see also Pls.’ App’x Ex. 180 at F-8, ECF No. 201-180. Indeed, both the Audit
Committee and Gibbons & Kawash have noted the incentive for Norfolk Southern to renew the
Lease after the initial 99-year term because it must pay the balance of indebtedness of (what was
then) over $13 million only at termination. See id.; see also Pls.’ App’x Ex. 179 at 3, ECF No.
201-179 (explaining, in a 2005 letter from PWV to the SEC, that “[t]he Trustees and Audit
Committee believe there is sufficient penalty upon the Lessee that the [L]ease will be renewed
into perpetuity.”).
PWV cannot now ignore history by simply calling its own past actions irrelevant. Nor
can it challenge that precept of the Settlement Account by invoking the codification of the
economic substance doctrine, which cannot apply to the Lease based on its effective date. The
Settlement Account also is not, as PWV suggests, a short-term debt due on demand—a concept
that is unsupported by the text of the Lease and disconnected from its historical representations
regarding indebtedness. The balance of the Settlement Account may have changed following tax
and accounting changes in the late-1970’s and early-1980’s in manners that the parties did not
anticipate in 1962, but the parties’ treatment of the Settlement Account has remained the same
until now.
Moreover, PWV’s reliance on tax law and accounting principles do not change the
outcome.
As a threshold matter, the Court cannot determine liability for taxes under the
Declaratory Judgment Act, see 28 U.S.C. § 2201, which Defendants’ theories would necessarily
have the undersigned do, see Defs.’ Br. in Opp. at 67, ECF No. 213 (“Norfolk Southern’s
deduction of additional rent is inconsistent with more recent tax rules, including IRC § 467,
63
because the net present value of Norfolk Southern’s obligation under the Settlement Account (as
defined by Norfolk Southern’s definition) is significantly less than the rent deduction of
additional rent which it has claimed as deductions on its tax returns.”). Defendants also lack
standing to challenge Norfolk Southern’s treatment of its taxes, which the IRS monitors with a
“full-time” auditor assigned to Norfolk Southern. See generally Defs.’ Br. in Opp. at 89, ECF
No. 213 (“Either [Norfolk Southern] falsely under-reported its taxes to the IRS or it must change
its position relative to the Settlement Account.”). Defendants’ position is therefore unavailing.
The task before this Court is to examine the Lease and ascertain the intent of the
contracting parties as objectively manifested by them. In doing so, the Court has concluded that
Plaintiffs’ proposed interpretation is consistent with the terms of the parties’ agreement and their
course of performance; a review of the Lease and the historical representations of PWV simply
do not support their newfound position. Accordingly, the Court will GRANT Plaintiffs’ motion
for summary judgment as to Count Eight of the First Amended Complaint and Defendants’ Third
Counterclaim to the extent they concern the payment of the balance of the Settlement Account;
and it will DENY Defendants’ motion regarding same.
6. The Accrual of Interest on the Balance of the Settlement Account
The Lease mentions the accrual of interest twice, and neither occasion relates to
indebtedness owed from Lessee to Lessor. First, Section 11 provides that “[a]ny indebtedness of
Lessor to Lessee under this Lease shall, after termination of this Lease, be payable by Lessor to
Lessee only if and to the extent that Lessor shall have net income available for such purpose
before payment of any dividends upon its capital stock, plus interest on any unpaid amounts at
the rate of 6% per annum.” See Pls.’ App’x Ex. 1 at 15, ECF No. 201-1. Second, Section 12
states that “Lessor shall be entitled to payment of all damages suffered by Lessor by reason of or
64
arising out of the breach or default of Lessee or termination of this Lease, with interest thereon at
6% per annum . . . .” Id. at 16. To be sure, the Lease does not provide for the accrual of interest
on the additional rent or the balance of indebtedness payable to Lessor by Lessee.
Defendants’ request that the Court declare that certain asset sales and the Settlement
Account accrue interest consistent with the AFR thus finds no support in the Lease, and the
parties’ course of performance sheds no additional light on this issue. Accordingly, the Court
will GRANT Plaintiffs’ motion for summary judgment as to Count Eight of Plaintiffs’ First
Amended Complaint and the Third Counterclaim to the extent they relate to the accrual of
interest; and it will DENY Defendants’ motion for summary judgment regarding same.
C. The Tax Memorandum
At Count One, Plaintiffs seek to have this Court declare that the amount owed to
Defendants as a result of the disposition of the West End Branch is the amount of the income tax
payments, that Plaintiffs will be fully compliant with Section 4(b)(7) of the Lease upon payment
of that amount, that Plaintiffs are not required to pay Defendants’ attorneys’ fees under Section
4(b)(6) of the Lease, and that Defendants are prohibited from declaring Plaintiffs in default of the
Lease or otherwise interfering with their use of the Demised Property.
At Count Seven,
Plaintiffs seek a declaration that Norfolk Southern is not in default of the Lease for failing to
reimburse PWV for legal fees as demanded on March 23, 2012.
Defendants’ Second Counterclaim seeks a declaration that Norfolk Southern is in default
under the Lease for failing to pay PWV’s Section 4(b)(7) tax payments as additional rent; and
their First and Tenth Counterclaims seek a declaration that Norfolk Southern is in default of
Section 4 of the Lease for, respectively, (1) failing to pay PWV $4,487.50 in attorney’s fees it
incurred in connection with its review of the contractual and tax issues related to the West End
65
Branch sale; and (2) refusing to reimburse PWV for legal fees incurred, as demanded on March
23, 2012.
For the reasons that follow, the Court concludes that Norfolk Southern is not in default of
Section 4(b)(7) of the Lease; and that Norfolk Southern is not required to pay Defendants’
attorney’s fees related to the sale of the West End Branch or otherwise.
1. Section 4(b)(7) Rent
Section 4(b)(7) provides that additional rent includes “[a]ll taxes, assessments and
governmental charges, ordinary and extraordinary, . . . which are lawfully imposed upon Lessor
or the demised property or its income or earnings . . . ” and that “[t]he foregoing sums shall be
paid or discharged by Lessee as and when they become due and payable.” Pls.’ App’x Ex. 1 at
5-6, ECF No. 201-1. Under the Lease, Section 4(b)(7) additional rent may not be treated as
indebtedness pursuant to Section 16, which only references Sections 4(b)(1)-(4) additional rent.
Defendants have repeatedly relied upon Section 4(b)(7) in seeking a cash payment from
Norfolk Southern as additional rent.
Initially, PWV cited Section 4(b)(7) in the Tax
Memorandum in their pursuit of $1.2 million in shareholder distributions related to the West End
Branch sale. By all accounts, Defendants have since abandoned this theory. See supra n.14.
Defendants now contend that Norfolk Southern deducted $69,663.00 from the Settlement
Account, rather than pay this amount to PWV as additional rent. Norfolk Southern concedes that
it made this accounting error but that it has since corrected its mistake. See supra n.15. In turn,
Defendants argue that “Norfolk Southern’s treatment of the Section 4(b)(7) tax payment in this
66
way is inconsistent with how ‘additional rent’ is to be treated under the Lease and is the
equivalent of paying PWV with its own money.” 32 Defs.’ Br. in Opp. at 75, ECF No. 213.
There are fundamental flaws with Defendants’ most recent position. As a threshold
matter, there is no evidence in the record that P&WV’s taxes have not been paid by Norfolk
Southern when they become due and payable pursuant to Section 4(b)(7). Additionally, as
Plaintiffs highlight, “[t]o the extent P&WV’s tax returns were incorrect, P&WV is indemnified
for taxes. P&WV has suffered no detriment in any event, as there is no record evidence that the
IRS has found any deficiencies in its tax filings.” Pls.’ Br. in Opp. at 14, ECF No. 210. Without
any evidence to the contrary, the Court cannot conclude that Norfolk Southern is in default of the
Lease. Accordingly, the Court will GRANT Plaintiffs’ motion for summary judgment as to
Count One and Defendants’ Second Counterclaim to the extent they concern the payment of
additional rent under Section 4(b)(7).
32. Although it is somewhat unclear, PWV’s position appears to be that Norfolk Southern should have paid in cash
an amount that corresponded with the payment/discharge of its taxes and/or any reduction in the Settlement
Account. As Defendants states in its pleading:
179. Under Section 4(b)(7), the tax payment to P&WV or discharged on P&WV’s behalf
constitutes “additional rent.” Thus, Norfolk Southern’s obligation to pay or discharge P&WV’s
taxes requires that Norfolk Southern provide a cash payment to P&WV as additional rent
representing the payment due to various taxing authorities for P&WV’s income taxes . . . .
185. A voluntary “reduction” in the “Settlement Account” by Norfolk Southern is permissible
under the terms of the Lease. Accordingly, all payments by Norfolk Southern denominated as
payments for P&WV’s taxes are not 4(b)(7) payments of additional rent but represent voluntary
payments to reduce the balance owed P&WV under the “Settlement Account.” These payments
do not excuse Norfolk Southern’s obligation to reimburse P&WV’s taxes as additional rent under
Section 4(b)(7) of the Lease.
Defs.’ Am. Answer and Countercls. at 25-26, ECF No. 71. This position runs counter to the parties’ longstanding
understanding (and practice) that the only cash payment due under the Lease is the $915,000 rental. See supra Part
I.A.4.e..
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2. Demands for Attorney’s Fees
The relevant provisions of the Lease with regard to the dispute regarding the payment of
attorney’s fees are Sections 4(b)(5) and 4(b)(6). Section 4(b)(5) provides that additional rent
includes:
all interest, expenses, fees and any other sums (except for principal, sinking fund
payments or other sums to be paid or advanced pursuant to Section 7 hereof and
except for any obligations incurred by Lessor solely for the benefit of its
stockholders or reasonably allocable thereto) payable by Lessor . . . . The
foregoing sums shall be paid or discharged by Lessee as and when they become
due and payable.
Pls.’ App’x Ex. 1 at 5, ECF No. 201-1. Under Section 4(b)(6), additional rent also includes:
Such sums, if any, as may be required to pay all obligations reasonably incurred
by Lessor for the doing of all acts and things which Lessor 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 Lessor’s rights in the
demised property or the rentals or other sums payable pursuant to this Lease,
except such obligations incurred by Lessor solely for the benefit of its
stockholders or reasonably allocable thereto, or in connection with nondemised
property or reasonably allocable thereto.
Id. Notably, neither Section 4(b)(5) nor Section 4(b)(6) mention “attorney’s fees.” However, the
drafters did know how to provide for attorney’s fees because they otherwise did so. See id. at 14
(“Lessee shall indemnify Lessor against liability, including costs and attorneys’ fees, which may
be incurred by Lessor under its collective bargaining agreements . . . .”); id. at 16 (“Lessor shall
be entitled to payment of all damages suffered by Lessor by reason of or arising out of the breach
or default of Lessee or termination of this Lease, with interest thereon at 6% per annum, plus a
reasonable attorney’s fee and costs and expenses of Lessor.”).
Defendants’ nevertheless seek a declaration that Norfolk Southern is in default for failing
to pay, as additional rent, its legal fees incurred “in connection with a ‘necessary or desirable’
legal review of issues relating to [the West End Branch sale]” and relating to this action. Defs.’
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Br. at 41, ECF No. 197. From Defendants’ perspective, “[t]his action was brought by Norfolk
Southern and WLE and is fundamentally about rights under the Lease – it is necessary that PWV
is represented by counsel and desirable to understand the rights of the parties under the Lease.”
Id. The Court cannot agree.
Under Pennsylvania law, “[c]ounsel fees are recoverable only if permitted by statute,
clear agreement of the parties, or some other established exception.” Knecht, Inc. v. United Pac.
Ins. Co., 860 F.2d 74, 80 (3d Cir. 1988) (citing Corace v. Balint, 210 A.2d 882, 887 (Pa. 1965)).
Applying Pennsylvania law, the United States Court of Appeals for the Third Circuit has held
that contract language “such sum or sum ‘as may be justly due’” did not include attorney’s fees
absent an express provision allowing for recovery. See Knecht, 860 F.2d at 81 (“Yet in United’s
bond no reference was made to attorney’s fees.
In the circumstances, we conclude that
attorney’s fees are not recoverable in this action.”). Relying on that decision, other courts have
concluded that language which more closely resembles the Lease was insufficient to shift
attorney’s fees under Pennsylvania law. See, e.g., In re Bradstreet, No. 01-18357DWS, 2002
WL 31987287, at *6 (Bankr. E.D. Pa. Dec. 31, 2002) (observing that the generalized language of
a Lease—“Lessee agrees to pay as rent . . . any and all damages, costs, and expenses which the
Lessor may suffer or incur by reason of any default of the Lessee or failure on his part to comply
with the covenants of this lease”—was not a “‘clear agreement’ which would support an
exception to the American Rule thereby shifting attorneys’ fees and litigation costs to the other
party”).
At the same time, the interpretation of broad contractual language is a context-specific
task when deciding whether attorney’s fees and litigation costs are within the purview of an
agreement. For example, in Sloan & Co. v. Liberty Mutual Insurance Co., our court of appeals
69
held that the term “expenses and costs” includes attorneys’ fees in addition to other litigationrelated expenses and costs when used in “in a paragraph discussing procedural mechanisms for
lawsuits and other dispute resolution proceedings.”
653 F.3d 175, 186-87 (3d Cir. 2011)
(citations omitted)
Section 4(5) and Section 4(b)(6) have no similar context; they relate to the payment of
additional rent. Nor is there any statutory authority or other recognized exception to the rule
present here. Without more, the Court cannot conclude that those sections represent a clear
agreement of the parties to shift attorney’s fees and costs. In fact, had the parties intended to
include a fee-shifting provision for circumstances now envisioned by Defendants, they could
have explicitly done so just as they did elsewhere in the Lease. But they did not. Accordingly,
the Court will GRANT Plaintiffs’ motion for summary judgment as to Count One, Count Seven,
and the First and Tenth Counterclaims to the extent they concern the payment/reimbursement of
attorney’s fees; and it will DENY Defendants’ motion for summary judgment regarding same.
D. The Books and Records Demands
At Count Two, Plaintiffs seek to have this Court declare that Norfolk Southern is not in
default of the Lease by failing to agree to provide Defendants with access to all of the books and
records which they requested in their January 6, 2012 and subsequent letters and that Defendants
may not conduct a track inspection; and to declare the proper and reasonable scope of the books
and records which Defendants may inspect under Section 8(a)(3). At Count Six, Plaintiffs seek
to have this Court declare that Norfolk Southern is not in default of the Lease with respect to the
March 5, 2013 Books and Records demand.
Defendants’ Fourth Counterclaim seeks a declaration that Norfolk Southern is in default
of Section 8(a)(3) of the Lease based on its failure and/or refusal to provide PWV with access to
70
the books and records included in the January 6, 2012 Letter; that Plaintiffs may not prohibit
and/or prevent PWV from conducting a track inspection; and (3)that Norfolk Southern is in
breach of the Lease based on its refusal to permit PWV to conduct a track inspection.
Defendants’ Ninth Counterclaim seeks a declaration that Norfolk Southern is in default of the
Books and Records Provision of the Lease based on its failure and/or refusal to provide PWV
with full and complete access to the books and records included in the March 5, 2013 demand.
For the reasons that follow, the Court concludes that Plaintiffs are not in default of
Section 8(a)(3) of the Lease and that Norfolk Southern is not in breach of the Lease with regard
to the track inspection demand. The Court does, however, decline to issue an “advisory opinion”
regarding the proper and reasonable scope of the Books and Records Provision.
Section 8(a)(3) of the Lease provides that the Lessor or the Lessee “shall permit at any
and all reasonable times such person or persons as the [other] may designate to inspect the books
and records of [the other] for any purpose whatsoever.” Pls.’ App’x Ex. 1 at 9, ECF No. 201-1.
The only limitation on Section 8(a)(3) is reasonableness.
In PWV’s January 6, 2012 letter, it demanded that within two business days (five days
altogether) Norfolk Southern make available its books and records related to the following:
• Financial Statements including detail and support related to all revenues,
expenses, cash-flows, assets and liabilities (including working capital, capital
assets, deferred maintenance, and related records) • Tax returns, including all
schedules and support work • From the commencement of the Lease, a historical
accounting of the “Settlement Account,” including each addition and subtraction
and supporting documentation • From the commencement of the Lease, all
property additions, improvements and replacements, including any planned or
projected additions, improvements and replacements to the demised property •
From the commencement of the Lease, all details related to all sales of PWV
property and all tax reimbursements payments related thereto • Railway volume in
terms of car loadings, tons transported, revenues and other metrics tracked by
Lessee on a per customer and per-category basis • Customer lists including
billings/usage • Track maintenance, including past, planned and deferred
maintenance capital expenditure • Current track condition reports and known
71
issues or degradation of track • Machinery, equipment, supplies, motive power,
rolling stock and cash needed to operate the railroad in a manner which will meet
the requirements of law and of shippers or passengers desiring transportation •
Properly descriptions, plans and specifications, including all interconnection
points with other railroad companies • Correspondence related to the Lease or
PWV • ICC/STB and governmental records, including all correspondence
between Lessee and any governmental authority • Any existing or pending
litigation related to the operations of PWV’s railroad [and] • Insurance.
Defs.’ App’x Ex. 68, ECF No. 202-69. A demand that broad in volume and scope, with only two
business days’ notice and in the midst of this litigation, is a far cry from reasonable. In fact, it is
entirely unreasonable to expect Norfolk Southern—whose size has been repeatedly highlighted
in this litigation by Defendant(s)—to comply with a demand for a litany of historical records
dating back fifty years which seeks information as open-ended as “Financial Statements
including detail and support related to all revenues, expenses, cash-flows, assets and liabilities”
or as sweeping as “Railway volume in terms of car loadings, tons transported, revenues and other
metrics tracked by Lessee on a per customer and per-category basis.” Id. Worse yet, even after
Plaintiffs changed course, Defendants rebuffed their attempts to narrow the scope of the request
so that they could actually comply with the demand and instead insisted on declaring a default
under the Lease.
To the Court, the evidence points in one direction: Defendants’ new
management attempted to manufacture a default of the Lease.
As for the March 2013 Books and Records Demand, the various correspondences
exchanged between the parties’ and their attorneys reflect that Plaintiffs complied with
Defendants’ request.
Upon receiving notice, Plaintiff(s) located in a storage facility and
produced over 23,000 pages of records at their expense. Plaintiffs have since supplemented that
production with financial and accounting records. The flaw in Defendants’ theory is that they
couch alleged discovery abuses as violations of the Lease—whether it is their argument that the
March 2013 documents were responsive to the January 2012 demand or their current position
72
that Plaintiffs have not yet produced all of the books and records sought. See Defs.’ Br. at 58,
ECF No. 197 (“Plaintiffs’ dilatory and incomplete production raises the issue of what other
documents it may possess which it has not yet turned over. In any event, Plaintiffs’ untimely
production is clear proof of a default under Section 8(a)(3) of the Lease, which default is not
curable . . . . Incomplete production is wholly inconsistent with the clear terms of Section
8(a)(3).”). Of course, Section 8(a)(3) says nothing of production.
Finally, neither Section 8(a)(3) nor any other section of the Lease mentions or alludes to
the right to a track inspection. A “track” is neither a “book” nor a “record.” The Court is thus at
a loss as to how it could declare that “Norfolk Southern is in breach of the Lease based on its
refusal to permit P&WV to conduct a track inspection,” as Defendants request. Defs.’ Suppl.
Counterclaims at 9, ECF No. 40.
Accordingly, the Court will GRANT Plaintiffs’ motion for summary judgment as to
Counts Two and Six and the Fourth and Ninth Counterclaims; and it will DENY Defendants’
motion for summary judgment regarding same.
IV. Conclusion
For the reasons hereinabove stated, the Court concludes (1) that the Lease affords the
Lessee (and thus its Sublessee) the right to enter into, control, and receive the benefits from
third-party agreements, including those agreements that relate to the subsurface; (2) that the
licenses, easements, and leases are not “dispositions” under Section 9 of the Lease; (3) that the
5% cap on the balance of indebtedness is no longer applicable; (4) that Norfolk Southern neither
breached the Lease nor defrauded PWV in connection with its treatment of the Settlement
Account or its obligations to provide statements related to the balance of indebtedness; (5) that
Norfolk Southern is not in default for failing to pay $341,768 in additional rent for 2012; (6) that
73
the balance of the Settlement Account is not due until the termination of the Lease; (7) that
interest is not due on the amounts accounted for in the Settlement Account; (8) that Norfolk
Southern is not in default of Section 4(b)(7) of the Lease; (9) that Norfolk Southern is not
required to pay Defendants’ attorney’s fees related to the sale of the West End Branch or
otherwise; (10) that Plaintiffs are not in default of Section 8(a)(3) of the Lease; and (11) that
Norfolk Southern is not in breach of the Lease with regard to the track inspection demand.
Accordingly, the Court will GRANT Plaintiffs’ partial motion for summary judgment,
DENY Defendants’ partial motion for summary judgment, and DENY Plaintiffs’ Supplemental
Motion to Deem Admitted Certain Paragraphs of Plaintiffs’ Statement of Material Facts and
Plaintiffs’ Additional Undisputed Facts and to Strike Objections. An appropriate Order and
Judgment will follow.
McVerry, S.J.
74
IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF PENNSYLVANIA
NORFOLK SOUTHERN RAILWAY
COMPANY and WHEELING & LAKE ERIE
RAILWAY COMPANY,
Plaintiffs,
vs.
PITTSBURGH & WEST VIRGINIA
RAILROAD and POWER REIT,
Defendants.
)
)
)
)
)
)
)
)
)
)
)
)
)
2:11-cv-1588-TFM
ORDER OF COURT
AND NOW, this 22nd day of April, 2015, in accordance with the foregoing Memorandum
Opinion, it is hereby ORDERED, ADJUDGED and DECREED as follows:
(1) the MOTION FOR PARTIAL SUMMARY JUDGMENT (ECF No. 196) filed by
Defendants/Counterclaim Plaintiffs Pittsburgh & West Virginia Railroad and Power
REIT is DENIED;
(2) the MOTION FOR PARTIAL SUMMARY JUDGMENT (ECF No. 198) filed by
Plaintiffs/Counterclaim Defendants Norfolk Southern Railway Company and Wheeling
& Lake Erie Railway Company is GRANTED; and
(3) PLAINTIFFS’ SUPPLEMENTAL MOTION TO DEEM ADMITTED CERTAIN
PARAGRAPHS OF PLAINTIFFS' STATEMENT OF MATERIAL FACTS AND TO
STRIKE OBJECTIONS (ECF No. 226) is DENIED.
IT IS FURTHER ORDERED that a telephonic status conference with counsel will be
conducted by the Court regarding the future direction of this litigation on Wednesday, April 29,
2015 at 9:00 AM. Counsel are responsible for coordinating the call to Chambers on one
telephone line at that time.
BY THE COURT:
s/Terrence F. McVerry
Senior United States District Judge
cc:
Samuel W. Braver
Email: samuel.braver@bipc.com
Stanley Parker
Email: stanley.parker@bipc.com
Kathleen J. Goldman
Email: kathleen.goldman@bipc.com
Bradley J. Kitlowski
Email: bradley.kitlowski@bipc.com
Edward P. Gilbert
Email: egilbert@morrisoncohen.com
Patricia L. Dodge
Email: pld@muslaw.com
Nicholas J. Bell
Email: njb@muslaw.com
(via CM/ECF)
2
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