Norfolk S. Ry. Co. v. Pittsburgh & W. Va. R.R.

• Citation: 153 F.Supp.3d 778
• Decision Date: 29 December 2015
• Docket Number: 2:11-cv-1588-TFM
• Court: U.S. District Court — Western District of Pennsylvania
• Parties: Norfolk Southern Railway Company and Wheeling & Lake Erie Railway Company, Plaintiffs, v. Pittsburgh & West Virginia Railroad and Power REIT, Defendants.

153 F.Supp.3d 778

Norfolk Southern Railway Company and Wheeling & Lake Erie Railway Company, Plaintiffs,

v.Pittsburgh & West Virginia Railroad and Power REIT, Defendants.

2:11-cv-1588-TFM

United States District Court, W.D. Pennsylvania.

Filed December 29, 2015

Stanley Parker, Bradley J. Kitlowski, Kathleen J. Goldman, Samuel W. Braver, Buchanan Ingersoll & Rooney PC, Pittsburgh, PA, for Plaintiffs.

Edward P. Gilbert, Brett D. Dockwell, Morrison Cohen, LLP, New York, NY, Patricia L. Dodge, Nicholas J. Bell, Meyer, Unkovic & Scott LLP, Pittsburgh, PA, for Defendants.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

Terrence F. McVerry

, Senior United States District Judge

I. Introduction

The remaining claims in this four–year–old saga are breach of contract (Count Three) and fraud (Count Four) brought by Plaintiffs Norfolk Southern Railway Company and Wheeling & Lake Erie Railway Company against Defendants Pittsburgh & West Virginia Railroad and Power REIT. Both counts are set forth in Plaintiffs' Second Supplement to Complaint and incorporated by reference in their First Amended Complaint. Plaintiffs seek injunctive relief and monetary damages.

On August 3 through August 6, 2015, the Court conducted a non–jury trial during which witness testimony and evidence was presented. All parties were represented by counsel who presented and argued the issues skillfully and effectively. The transcript of the proceedings has been filed of record, and the parties have filed Proposed Findings of Fact and Conclusions of Law.¹ The matter is now ripe for disposition. Accordingly, the Court issues the following Findings of Fact and Conclusions of Law pursuant to Federal Rule of Civil Procedure 52(a)

.

II. Findings of Fact

A. The Parties

1. This action concerns a lease dated July 12, 1962 entered into between The Pittsburgh & West Virginia Railway Company (“Pittsburgh & West Virginia”) and Norfolk and Western Railway Company (“Norfolk and Western”). See Joint Ex. 3.² Under the Lease, Pittsburgh & West Virginia leased 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.

2. Plaintiff Norfolk Southern Railway Company (“Norfolk Southern”) is the successor to the interest of Norfolk and Western in the Lease.

3. Plaintiff Wheeling & Lake Erie Railway Company (“Wheeling & Lake Erie”), formerly Wheeling Acquisition Corporation, 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”). Pls.' Ex. 48.

4. Defendant Pittsburgh & West Virginia Railroad (“PWV”) is a business trust and the successor–in–interest to The Pittsburgh & West Virginia Railway Company.

5. Defendant 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.

B. The Lease

6. The Lease is dated July 12, 1962 and became effective October 16, 1964. At present, the Lease remains in effect.

7. The term of the Lease is 99–years, renewable in perpetuity at the option of the Lessee absent a default. The same terms and conditions, including the economic provisions of the Lease, remain in effect with each renewal.

8. 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)). At all relevant times, Norfolk Southern has paid annual rent solely to PWV.

9. As long as the Lease remains in effect, the parties agree to abide by several covenants. Section 8 of the Lease sets forth the “Covenants of Lessor,” which bind PWV.

10. Under Section 8(a)(1), PWV is required to “take all action, insofar as within its control, necessary to maintain and preserve to the extent of its rights and powers its corporate existence, subject to the provisions of Section 16(c)” of the Lease—a limited exception designed to permit the Lessor to became a real estate investment trust. Joint Ex. 3 at 8.

11. Section 8(a)(2) restricts PWV from issuing stock without the written consent of Norfolk Southern: “Lessor shall not issue, without the prior written consent of Lessee, which shall not be unreasonably withheld, any stock (or options to purchase such stock)....” Id.

12. Section 8(a)(5) also prohibits PWV from borrowing money or making advances: “Lessor shall not borrow any money, assume any guaranty, make advances...or enter into an agreement to make advances, including advances to a debtor or debtors in order to provide the latter with funds with which to pay the principal of, premium, if any, or interest on indebtedness....” Id. at 9.

13. Section 8(b)(1) similarly limits the amount of dividends that PWV may declare:

(b) After the commencement of the term of this Lease and during any renewal thereof:

(1) Lessor shall not declare any dividend on its common stock in amount exceeding

(i) Nondemised property (and nondemised property substituted therefor), the proceeds thereof and income therefrom, and

(ii) The rent paid or to be paid pursuant to Section 4(a) hereof,

any income taxes payable in respect thereof and less any taxes or 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. at 10.

C. The Sublease

14. Under the Sublease, Norfolk Southern subleased to Wheeling & Lake Erie all of its rights under the Lease and interest therein for a period commencing on the Closing Date and ending one year prior to the end of the initial term of the Lease.

15. Wheeling & Lake Erie thus assumed “all of the duties, obligations, liability and commitments of [Norfolk and Western] as lessee...except the balance in the account due Lessor because of dispositions of property under Section 9 of the Lease,” which is referred to as the “Settlement Account” in the Sublease. Pls.' Ex. 48 at 2. 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) of the Lease. That term does not appear in the Lease. Even so, the Settlement Account reportedly had a balance of approximately $16.6 million in favor of PWV as of December 31, 2012. Aug. 4, 2015 Tr. at 65.

16. The Sublease requires Wheeling & Lake Erie to indemnify, defend, and hold harmless Norfolk Southern “from and against any and all liability, loss, damage, costs, judgments, claims and expenses arising out of occurrences during the term of [the Sublease], (including, without limitation attorneys' fees.”). Pls.' Ex. 48 at 4.

D. PWV's Change in Management

17. From the commencement of the Lease until 1995, the administrative functions of PWV were handled through International Mining, a company affiliated with Lewis Harder, one time Chairman of the Board of Trustees for PWV.

18. In 1995, PWV relocated all administrative functions to the office of Port Amherst in Charleston, West Virginia.

19. Port Amherst was the family business of Herbert E. Jones Jr. (“Mr. Jones Jr.”), Charles Jones, and Herbert Jones, III (“Mr. Jones III”) all of whom served as Trustees at various times since the inception of the Lease.

20. PWV moved its principal place of business to West Babylon, New York in 2011 after David Lesser gained control of the company.

21. Lesser is currently the Chairman of the Board, the Chief Executive Officer, Secretary, and Treasurer of both PWV and Power REIT. He previously worked as an investment banker for Merrill Lynch in the late–1980s and mid–1990s, during which time he participated in the “dawn of the modern REIT era” that occurred after a major change in tax law. Aug. 6, 2015 Tr. at 70. In 1995, Lesser joined Crescent Real Estate Equities as an in–house advisor and founded Hudson Bay Partners, LP, an investment firm that focuses on real estate and alternative energy. Lesser also owns a real estate company, DHL Realty, and serves as the chairman and CEO of Millennium Investment and Acquisition Company. Based on the breadth of his experience, Lesser considers the “REIT space” his “particular expertise.” Aug. 3, 2015 Tr. at 40.

22. Sometime in 2007, Lesser began accumulating stock in PWV (then–a publically traded company), eventually having obtained a large number of shares. Aug. 6, 2015 Tr. at 60. At that time, the sole nature of PWV's business was to receive rentals, pay corporate expenses, and make dividend payments to its shareholders. Id. at 61. In fact, Lesser considered PWV an attractive investment because it had one asset, no debt, and paid a rate of return in the form of a dividend—all of which he learned through his review of PWV's public filings with the U.S. Securities and Exchange Commission (“SEC”). Id. at 60–61.

23. At the same time, however, Lesser viewed PWV's corporate organization—a publicly traded, single purpose entity—as unusual for a REIT. Aug. 5, 2015 Tr. at 42, 44. In his experience, a REIT typically features a publicly-traded parent company with a subsidiary partnership that owns the (real estate) assets or interest therein through further subsidiary entities, such as a special purpose vehicle. See Aug. 3, 2015 Tr. at 40; see also Aug. 5, 2015 Tr. at 43–44 (“[Lesser]: The typical REIT today would organize with a parent company, which would be public—for a public REIT. There are private REITs. For a public REIT, it would own typically what is referred to as an UPREIT that would in many cases have other partners. Then typically the actual asset, the real estate assets, would be owned by a series of separate entities,...