Consolidated Rail Corp. v. PROVIDENCE & WORCESTER

• Decision Date: 04 June 1982
• Docket Number: Civ. A. No. 77-445.
• Citation: 540 F. Supp. 1210
• Parties: CONSOLIDATED RAIL CORPORATION, Plaintiff, v. PROVIDENCE & WORCESTER COMPANY, Defendant.
• Court: U.S. District Court — District of Delaware

540 F. Supp. 1210

CONSOLIDATED RAIL CORPORATION, Plaintiff, v. PROVIDENCE & WORCESTER COMPANY, Defendant.

Civ. A. No. 77-445.

United States District Court, D. Delaware.

June 4, 1982.

COPYRIGHT MATERIAL OMITTED

Robert K. Payson of Potter, Anderson & Corroon, Wilmington, Del., and Laurence Z. Shiekman, Gail P. Granoff and Edwin J. Butterfoss of Pepper, Hamilton & Scheetz, Philadelphia, Pa., for plaintiff.

R. Franklin Balotti of Richards, Layton & Finger, Wilmington, Del., and Richard J. Morvillo and Robert B. Donin of Verner, Liipfert, Bernhard, & McPherson, Chartered, Washington, D. C., for defendant.

OPINION

LATCHUM, Chief Judge.

Consolidated Rail Corporation ("Conrail") brought this civil action on November 15, 1977, against the defendant, Providence & Worcester Company ("P&W"), seeking to recover certain interline freight revenues allegedly being unlawfully withheld by P&W. (Docket Item "D.I." 1.)¹ Count I of the complaint is based on P&W's alleged breach of four related agreements² wherein P&W and The Penn Central Transportation Company³ ("Penn Central") agreed to apportion joint freight revenues according to specified divisional bases. Count II is based on P&W's alleged breach of its fiduciary duty as trustee of the funds collected on behalf of Conrail. The complaint seeks damages for the amounts that are allegedly being wrongfully withheld by P&W to the date of judgment, plus interest and costs, and an order directing P&W to apply the divisions bases set forth in the Agreements of 1973, 1974, and 1975 in settling the joint freight revenue accounts with Conrail until a different basis or bases are fixed by the Interstate Commerce Commission ("ICC"). (D.I. 1.)

On April 19, 1978, P&W filed an answer to Conrail's complaint, and asserted six counterclaims. (D.I. 26.) Conrail answered certain of P&W's allegations and filed motions with respect to the remaining counterclaims and affirmative defenses. (D.I. 31.) After a hearing on Conrail's motions, a Stipulation and Order was entered which, in essence, required P&W to amend its answer and counterclaims. (D.I. 46.) Accordingly, on April 30, 1979, P&W filed an amended answer containing twelve affirmative defenses and nine counterclaims. (D.I. 47.) Prior to trial, P&W agreed to dismiss with prejudice its first and sixth counterclaims along with its fourth and ninth affirmative defenses. (D.I. 93.) During the course of post-trial briefing, P&W conceded that it was abandoning its seventh and eighth counterclaims. (D.I. 124, p. 71, n. 79; D.I. 125, p. 5, n. 6.)

In the remaining counterclaims, P&W alleges that the 1976 Agreement relied on by Conrail is void due to fraud in the inducement, that because of breaches by Conrail, the 1976 Agreement is void or voidable at the option of P&W, that since 1976 all previous agreements respecting divisions between Conrail and P&W have been superseded by a stipulation entered into between Conrail, P&W and the plaintiff in a prior action captioned "H. J. Baker & Bro. Inc. v. Providence & Worcester Co. and Consolidated Rail Corporation, Civil Action No. 76-1364-G," in the United States District Court for the District of Massachusetts ("Baker Stipulation") (DX 7), that Conrail has breached the Baker Stipulation and that Conrail has misrouted traffic destined for the P&W. (D.I. 47.) Conrail replied to P&W's counterclaims on May 21, 1979, denying that the 1976 Agreement was procured by fraud or that Conrail had breached the 1976 Agreement, denying that the Baker Stipulation established divisions between the parties or that Conrail had breached the Baker Stipulation and denying that any traffic destined for P&W was misrouted by Conrail. (D.I. 48.)

A bench trial was conducted from January 18, 1982 through January 26, 1982. After carefully considering the sufficiency and weight of the testimony adduced at trial, the demeanor and credibility of the witnesses who testified, the documents admitted into evidence and the post-trial briefs of the parties (D.I. 116, 124, 125 & 128),⁴ the Court enters this opinion which shall constitute the Court's findings of fact and conclusions of law in accordance with Rule 52(a), F.R. Civ.P.

I. THE FACTS

A. Background Facts

Prior to 1968, The Pennsylvania, New York Central, New Haven and Boston & Maine railroads were among those which participated in the transportation of freight in the Northeast section of the United States. (Tr. 84.)⁵ Although the New Haven did not own all of its rail lines, it operated, as lessee, rail lines owned by the P&W and the Norwich and Worcester Railroad ("N&W"). (Tr. 270.) In 1961, the New Haven entered reorganization under the Bankruptcy Act. Thereafter, in 1968, the Pennsylvania Railroad merged with the New York Central, and the New Haven eventually was included in the Pennsylvania-New York Central Merger. (Tr. 85, 272.) However, the lease under which the New Haven operated the P&W line was rejected by the New Haven's trustees. (Tr. 271-274.) Nevertheless, the ICC ordered Penn Central after the merger to operate the P&W line under the rejected lease subject to two conditions which P&W ultimately found objectionable. As a result, P&W withdrew its application for inclusion in the merged Penn Central system and received the ICC's permission to begin independent operations over the line. (Tr. 272-73, 276.) At the time P&W commenced rail operations in 1973, its lines connected to the north and south with, among others, Penn Central. (Tr. 280.)

In the period immediately after the Penn Central merger and the inclusion of the New Haven railroad, but prior to P&W resuming independent operations, only two railroads conducted freight operations and interchanged traffic at Worcester, Massachusetts: Penn Central and B&M. (Tr. 312.) Although one portion of the track at Worcester was owned jointly in one-third shares by B&M, P&W and N&W, and a second portion was owned jointly by P&W and N&W (Tr. 313, 467-68), Penn Central leased and operated the P&W and N&W lines, and thus achieved a direct interchange with the B&M. (Tr. 312-13.) Even after P&W resumed independent operations in 1973, Penn Central continued to interchange directly with B&M at Worcester by virtue of its continuing lease and operation of the lines owned by the N&W. (Tr. 82-83, 287-88, 312-13.)

As an independent operating railroad, P&W was required, among other things, to establish joint routes rates and divisions with respect to freight traffic which it received from and/or delivered to a connecting carrier. (Tr. 280.) In particular, P&W negotiated and executed a divisions agreement with Penn Central. On February 6, 1973, P&W and Penn Central executed the "1973 Agreement" in which, inter alia, the divisional bases were established "unless and until a different basis or different bases are fixed by the Interstate Commerce Commission." (PX 3.) The 1973 Agreement was amended, in part, by the "1974 Agreement," (PX 4), which, in turn, was modified by a January 29, 1975 Agreement ("1975 Agreement") (PX 5). Therefore, prior to April 1, 1976, all revenues produced by the haul of joint freight by Penn Central and P&W were apportioned according to the divisional bases established in the 1973, 1974, and 1975 Agreements. (Tr. 429, 611-12.)

B. The 1976 Agreement

In the face of mounting railroad bankruptcies, Congress sought a massive restructuring of rail operations in the Northeast through the establishment of Conrail, a for-profit railroad corporation. 45 U.S.C. §§ 701, 741, 801. Pursuant to the Regional Rail Reorganization Act of 1973, as amended ("Rail Act"), the United States Railway Association ("USRA") was authorized to develop a Final System Plan ("FSP") designating the ownership and operation of trackage previously controlled by the railroads in reorganization. 45 U.S.C. §§ 711, 712, 716-19. Under the FSP, Conrail was charged with the responsibility of assuming and integrating the properties and operations of Penn Central and five other major bankrupt railroads. The Rail Act also provided that certain properties not conveyed to Conrail would be available for conveyance to other solvent railroads, one of which was P&W. Indeed, pursuant to the Rail Act and the FSP, P&W acquired the rail line from Worcester, Massachusetts to Plainfield, Connecticut, which previously had been owned by the N&W and operated under lease by Penn Central. (Tr. 312.) This acquisition by P&W included N&W's one-third ownership of the track formerly used by Penn Central to interchange with B&M at Worcester, and thereby severed the direct interchange between Conrail and the B&M at Worcester. (Tr. 312-14, 353.) Eventually, pursuant to a Supplemental Transaction, 45 U.S.C. § 745, P&W purchased from Conrail additional track on this line south to Groton, Connecticut. (Tr. 72.)

Other railroad companies which would connect with Conrail's lines after Conrail was activated were concerned that Conrail would not adopt "the joint routes, joint rates and divisions" which had been negotiated and were in effect between them and the railroads conveying property to Conrail as the framework for Conrail's commencement of operations, but would seek to renegotiate all agreements to get more favorable terms. (Tr. 37-40.) In October 1975, the Conrail Activation Team, whose responsibility it was to plan and implement Conrail's start-up operations, met in Washington with representatives from five solvent railroads whose rail lines would connect with Conrail's lines once Conrail began operations on April 1, 1976.⁶ (Tr. 37-42.) Although Conrail indicated its intention to adopt the joint routes, joint rates and divisions in effect between the railroads which were conveying property to Conrail and the solvent railroads whose lines would connect with Conrail lines after April 1, 1976, these five connecting carriers requested and received a formal, comprehensive agreement ("long form agreement") with respect to the adoption of these joint routes, joint rates and...