Snohomish Cnty. v. Surface Transp. Bd.

• Decision Date: 27 March 2020
• Docket Number: No. 19-1030,C/w 19-1136,19-1030
• Citation: 954 F.3d 290
• Parties: SNOHOMISH COUNTY, WASHINGTON, Petitioner v. SURFACE TRANSPORTATION BOARD and United States of America, Respondents City of Woodinville, Washington and King County, Washington, Intervenors
• Court: U.S. Court of Appeals — District of Columbia Circuit

954 F.3d 290

SNOHOMISH COUNTY, WASHINGTON, Petitioner

v. SURFACE TRANSPORTATION BOARD and United States of America, RespondentsCity of Woodinville, Washington and King County, Washington, Intervenors

No. 19-1030

C/w 19-1136

United States Court of Appeals, District of Columbia Circuit.

Argued January 6, 2020

Decided March 27, 2020

Charles H. Montange, Seattle, WA, argued the cause and filed the briefs for petitioner.

Barbara A. Miller, Attorney, Surface Transportation Board, argued the cause for respondents. With her on the brief were Michael F. Murray, Deputy Assistant Attorney General, U.S. Department of Justice, Robert B. Nicholson and Adam D. Chandler, Attorneys, Craig M. Keats, General Counsel, Surface Transportation Board, and Theodore L. Hunt, Associate General Counsel.

W. Eric Pilsk, Charles A. Spitulnik, and Allison I. Fultz were on the briefs for intervenor for respondent King County, Washington.

Before: Millett, Pillard, and Wilkins, Circuit Judges.

Concurring opinion filed by Circuit Judge Millett.

Pillard, Circuit Judge:

The Surface Transportation Board (the Board) often allows parties to acquire or operate railroad lines by submitting a streamlined "notice of exemption" in lieu of satisfying the Board's full certification requirements. Any exemption granted is "void ab initio " if the submitted notice contains "false or misleading information." 49 C.F.R. §§ 1150.32(c), 1150.42(c). Here, petitioner Snohomish County sought to revoke two exemptions the Board granted with respect to a freight rail easement over the County's property, alleging that both notices misrepresented the easement's ownership. The Board denied the County's petitions on the ground that only a court competent in property, contract, and bankruptcy law could determine whether the notices' representations were in fact false. Following the Board's denial, the County unsuccessfully sought reconsideration within the agency and twice petitioned this court for review. We conclude that we have jurisdiction over the County's second petition to review the Board's denial and hold that the Board's failure to consider whether the notices were independently misleading under the Board's own precedent—even if not demonstrably false as a matter of state or federal law—was arbitrary and capricious.

BACKGROUND

A. Legal Framework

The Surface Transportation Board, the successor to the Interstate Commerce Commission, regulates the freight rail industry in accordance with the "[r]ail transportation policy" set forth in 49 U.S.C. § 10101, which requires the Board, inter alia , to "encourage honest and efficient management of railroads," id. § 10101(9). In addition to regulating railroad rates and finance, the Board "regulates the sale and transfer of rail lines under 49 U.S.C. § 10901, governing construction and operation of railroad lines, and 49 U.S.C. § 10902, governing short-line purchases by Class II and Class III rail carriers." Ass'n of Am. R.R. v. Surface Transp. Bd. , 161 F.3d 58, 60 (D.C. Cir. 1998). As relevant here, Class III rail carriers are the smallest carriers in the Board's classification system, defined as carriers "having annual carrier operating revenues of $20 million or less" after an adjustment provided by regulation. See 49 C.F.R. § 1201.1-1(a). The Board's authority over rail operations and acquisitions is exclusive and preemptive of state remedies. 49 U.S.C. § 10501(b). A party seeking to acquire or operate a railroad line may do so "only if the Board issues a certificate authorizing such activity." 49 U.S.C. §§ 10901(a), 10902(a) ; see also Ass'n of Am. R.R. , 161 F.3d at 60.

To receive the necessary acquisition or operation certificate, the party must submit an application that provides information about itself and its proposed use of the line, including operational, financial, environmental, and energy data. See 49 C.F.R. §§ 1150.1 et seq. (describing § 10901 application requirements). Upon receiving the application and providing time for public comment, the Board issues the certificate, potentially with modifications or conditions, "unless the Board finds that such activities are inconsistent with the public convenience and necessity." 49 U.S.C. §§ 10901(c), 10902(c).

Congress has also encouraged the Board, "to the maximum extent consistent" with the statute, to "exempt a person, class of persons, or a transaction or service" from any or all of the governing statutory provisions insofar as compliance with those provisions "is not necessary to carry out the transportation policy" codified in 49 U.S.C. § 10101, and if either the "transaction or service is of limited scope" or the "application in whole or in part of the provision[s] is not needed to protect shippers from the abuse of market power." Id. § 10502(a)(1)-(2); see also Kessler v. Surface Transp. Bd. , 635 F.3d 1, 3 (D.C. Cir. 2011). That exemption authority "permits the [Board] to create expedited review processes" so that parties may "avoid sometimes cumbersome regulatory procedures when making small purchases." Ass'n of Am. R.R. , 161 F.3d at 60-61. The same section authorizes the Board to "revoke an exemption, to the extent it specifies," whenever it concludes that revocation is "necessary to carry out the transportation policy of section 10101." 49 U.S.C. § 10502(d).

The Board has accepted Congress' invitation to exempt certain classes of transactions from the full certification requirements of sections 10901 and 10902. The Board generally exempts "all acquisitions and operations under section 10901," including, as relevant here, "[a]cquisition[s] by a noncarrier of rail property that would be operated by a third party." 49 C.F.R. § 1150.31(a). And the Board exempts "acquisitions or operations by Class III rail carriers under section 10902," including, as relevant here, "[o]peration[s] by a Class III carrier of rail property acquired by a third party." Id. § 1150.41.

In parallel sets of regulations, the Board lays out the streamlined process for both exemptions. See 49 C.F.R. §§ 1150.31 et seq. , 1150.41 et seq. An applicant may qualify for an exemption simply by filing a "notice of exemption," i.e. , a "verified notice providing details about the transaction, and a brief caption summary." 49 C.F.R. §§ 1150.32, 1150.42. In the notice, the applicant must provide basic information, including the applicant's "full name and address," the "name, address, and telephone number" of the applicant's representative, a "statement that an agreement has been reached or details about when an agreement will be reached," the identity of the "operator of the property," and a "brief summary of the proposed transaction," including the "name and address of the railroad transferring the subject property," the "proposed time schedule for consummation of the transaction," the "mile-posts of the subject property," and the "total route miles being acquired." 49 C.F.R. § 1150.33(a) - (e) ; see also id. § 1150.43(a)-(e). Within sixteen days of the filing of the notice, the Board must publish notice of the proposed transaction in the Federal Register. Id. §§ 1150.32(b), 1150.42(b). In the absence of objection, the exemption becomes effective thirty days after the applicant files the notice. Id.

Crucially, and despite the streamlined nature of the exemption proceedings, both sets of regulations further caution that, if the applicant's "notice contains false or misleading information, the exemption is void ab initio ." Id. §§ 1150.32(c), 1150.42(c). The regulations also cross-reference the Board's exemption-revocation authority, stating that "[p]etitions to revoke the exemption under 49 U.S.C. § 10502(d) may be filed at any time." Id. §§ 1150.34, 1150.44. Snohomish County filed two such petitions to revoke exemptions the Board granted with respect to an easement on the County's property, giving rise to this dispute.

B. Factual and Procedural History

Before the events that prompted the County's petitions, BNSF Railway owned both the land and fixtures composing the railroad line at issue. In December 2009, BNSF deeded to the Port of Seattle the track, as well as other property and physical assets, between milepost 23.8 in Woodinville, Washington and milepost 38.25 in Snohomish, Washington, retaining only a freight rail easement over this segment of line. The same day, BNSF deeded that freight rail easement to an entity called GNP RLY, Inc., whose Chief Financial Officer and 50% shareholder was Douglas Engle. Thereafter, the underlying property was sold once more when, in 2016, the Port of Seattle deeded to Snohomish County the physical assets of the line between milepost 26.38—the border of the County—and milepost 38.25, and deeded to the City of Woodinville the remainder of the segment, between milepost 23.8 and milepost 26.38. The controversy here stems from two transactions involving the easement, each implicating one of the class exemptions described above.

First, in November 2012, a new company called Eastside Community Rail (Eastside), a non-carrier also controlled by Engle, filed a notice of exemption under 49 C.F.R. § 1150.31, stating that it had agreed to "purchase the assets of GNP RLY, Inc. in a bankruptcy proceeding," including the freight rail operating easement over "a line of railroad formerly owned by BNSF[ ] and extending from approximately milepost 23.8 in Woodinville to approximately milepost 38.25 in Snohomish." J.A. 9. Eastside's notice explained that it would not itself operate over the easement; rather, Eastside had entered into an operating lease agreement with Ballard Terminal Railroad Company (Ballard), a carrier that had been operating the line since 2010. Under that agreement, Ballard would "continue to operate the Line in the same fashion that it was operating the Line for GNP RLY." J.A. 10. To verify the information in the notice, Engle, as Managing Director of Eastside, submitted to the Board a sworn statement affirming that he "ha[d] read the foregoing Notice of Exemption...