Soo Line R.R. Co. v. Consol. Rail Corp., 19-3100
| Decision Date | 15 July 2020 |
| Docket Number | No. 19-3100,19-3100 |
| Citation | 965 F.3d 596 |
| Parties | SOO LINE RAILROAD COMPANY d/b/a Canadian Pacific, Plaintiff-Appellant, v. CONSOLIDATED RAIL CORPORATION, et al., Defendants-Appellees. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Andrew W. Davis, Benjamin D. Eastburn, Attorney, Stinson LLP, Minneapolis, MN, David C. Jensen, Attorney, Eichhorn & Eichhorn, LLP, Hammond, IN, Douglas R. Dalgleish, Attorney, Stinson LLP, Kansas City, MO, David F. Rifkind, Esq., Attorney, Stinson LLP, Washington, DC, for Plaintiff-Appellant.
Chad M. Clamage, Attorney, Mayer Brown LLP, Chicago, IL, Evan M. Tager, Attorney, Mayer Brown LLP, Washington, DC, for Defendant-Appellee Consolidated Rail Corporation.
A. Richard Musgrove Blaiklock, Attorney, Lewis Wagner, LLP, Indianapolis, IN, for Defendant-Appellee CSX Transportation, Inc.
Lawrence Adelson, Chico & Nunes, P.C., Chicago, IL, for Defendant-Appellee Indiana Harbor Belt Railroad Company.
Theodore R. Boehm, Attorney, Kenneth J. Munson, Attorney, Hoover Hull Turner LLC, Indianapolis, IN, for Defendant-Appellee Norfolk Southern Railway Company.
Nancy J. Townsend, Attorney, Krieg Devault LLP, Broadway Merrillville, IN, for Defendant-Appellee John Hart.
Before Sykes, Chief Judge, and Bauer And St. Eve, Circuit Judges.
Soo Line Railroad Company, which we refer to by its business name, Canadian Pacific, sought to bring state-law claims under the diversity jurisdiction of the district court. Its suit centered on a trackage rights agreement—a contract governing one railroad's use of another's track—that the Indiana Harbor Belt Railroad Company had signed with its majority shareholders at a price that Canadian Pacific, the minority shareholder, alleged was detrimental to Indiana Harbor's profitability.
Canadian Pacific, though, had a problem. The Surface Transportation Board (STB) has exclusive authority to regulate trackage rights agreements, or to exempt such agreements from its approval process, and it had exempted Indiana Harbor's agreement. The defendants argued that, by effect of this exemption authority, two statutes— 49 U.S.C. §§ 10501(b) and 11321(a) —independently preempted Canadian Pacific's claims. The district court agreed with both arguments, but in this appeal we focus on only one. The court concluded that § 11321(a) preempted the claims and noted that Canadian Pacific had made no argument otherwise. Because we agree that Canadian Pacific failed to contest this basis for dismissal, we affirm the judgment on grounds of waiver.
Although the ownership structure of Indiana Harbor is somewhat complex, we can simply summarize it. Plaintiff Canadian Pacific owns 49%; defendant Consolidated Rail Corporation owns 51%. Two other defendants, Norfolk Southern Corporation and CSX Corporation, indirectly own Consolidated Rail. Norfolk Southern and CSX each control two directors on Indiana Harbor's seven-person board and, thus, have a majority over Canadian Pacific's three directors.
Indiana Harbor operates as a switch carrier on tracks owned by Consolidated Rail and its parent companies near Chicago. These railroads managed their arrangement with a 99-year contract executed in 1906 between Indiana Harbor and the previous owners of the tracks. Under the 1906 agreement, Indiana Harbor would pay the track owners annual rent of approximately $150,000 for the use of the tracks, some of which it would supervise and maintain. The track owners would then pay Indiana Harbor a share of the operating and maintenance expenses for their proportional use of the supervised tracks. Near the turn of the century, Consolidated Rail was paying over $2 million a year in expenses.
Things changed in 1999. According to Canadian Pacific's amended complaint, which we accept as true in the posture of this appeal, Consolidated Rail stopped paying expenses and invoicing Indiana Harbor for rent that year. This alleged quid pro quo cessation lasted through the remainder of the contract term, which ended in 2005, and into the extended negotiations over a new trackage rights agreement.
Canadian Pacific alleges that during these negotiations, Consolidated Rail and its parent companies used their power as majority shareholders to force Indiana Harbor into an atrocious deal. Indiana Harbor's board had obtained an independent appraisal estimating that a fair annual rent for the tracks was $1.3 million and unanimously resolved to offer that much, but they were rebuffed. Instead, Consolidated Rail threatened to involve the STB; Norfolk Southern demanded the rent that had gone unpaid since 1999; and CSX even warned it would evict Indiana Harbor if it did not agree to a higher price. Under this pressure, Indiana Harbor's board split 4-3 along company lines to approve a new agreement at a total annual rent of $5 million and with terms that Canadian Pacific insists transferred ownership of Indiana Harbor's assets to the track owners.
Indiana Harbor, Consolidated Rail, Norfolk Southern, and CSX then notified the STB of their agreement. Under federal law, the STB must approve a trackage rights agreement before it can be carried out. 49 U.S.C. § 11323(a)(6). Regulations, however, exempt certain transactions from this approval process, including trackage rights agreements that are "(i) based on written agreements, and (ii) not filed or sought in responsive applications in rail consolidation proceedings." 49 C.F.R. § 1180.2(d)(7) ; see also 49 U.S.C. § 10502(a) (authorizing exemptions). The railroads all applied for this exemption, and the STB granted it over Canadian Pacific's request to stay the proceedings. Indiana Harbor Belt R.R.—Trackage Right—Consolidated Rail Corp., CSX Transp., Inc., & Norfolk S. Ry. , No. FD 36099, 2017 WL 992358 (Mar. 14, 2017).
Canadian Pacific predicated its stay motion on the litigation in this case. It had filed a verified complaint earlier that month alleging that Consolidated Rail, Norfolk Southern, and CSX had breached fiduciary duties they owed to it and Indiana Harbor under Indiana law. As remedies, Canadian Pacific sought compensatory and punitive damages based on the alleged overpayment for the trackage rights, voidance of the new agreement, an injunction requiring Indiana Harbor's board to approve only the $1.3 million price, and an order for Consolidated Rail to pay the operating and maintenance expenses it owed since 1999.
Consolidated Rail moved to dismiss the complaint for failure to state a claim. It argued that 49 U.S.C. § 10501(b) and 49 U.S.C. § 11321(a) independently preempted Canadian Pacific's claims.
Section 10501(b) gives the STB exclusive jurisdiction over "transportation by rail carriers, and the remedies provided in this part with respect to rates." Such remedies "with respect to regulation of rail transportation ... preempt the remedies provided under Federal or State law." 49 U.S.C. § 10501(b). Canadian Pacific was seeking remedies with respect to the rates charged for trackage rights, Consolidated Rail argued, so any state-law remedies were preempted.
Section 11321(a) provides that "[a] rail carrier, corporation, or person participating in ... [an] exempted transaction is exempt from the antitrust laws and all other law, including State and municipal law, as necessary to let that rail carrier, corporation, or person carry out the transaction." 49 U.S.C. § 11321(a). Because the STB exempted the trackage rights agreement, Consolidated Rail asserted that it was exempt from Indiana tort law to the extent the claims sought to prevent the terms of the transaction, including price, from being carried out.
Although neither preemption argument extended to the alleged failure to pay expenses in breach of the 1906 agreement, Consolidated Rail contended that claim failed for a different reason. It owed expenses only for its proportional use of the tracks, but the complaint never alleged that it had used the tracks after 1999.
Before the district court ruled on the first set of motions to dismiss, Canadian Pacific amended its complaint. It added more defendants, including the whole family of subsidiaries and holding companies through which Norfolk Southern and CSX owned Consolidated Rail, as well as the four directors who had approved the agreement. Regarding the expenses, though, it still failed to allege that Consolidated Rail had used the track after 1999.
Consolidated Rail, Norfolk Southern, and CSX jointly moved to dismiss, adopting Consolidated Rail's preemption arguments. Although it thoroughly contested the defendants’ reading of § 10501(b), Canadian Pacific did not respond to the § 11321(a) argument other than to assert, without elaboration, that the section did not preempt its claims.
A magistrate judge, presiding by consent, agreed with both of the defendants’ preemption arguments. Regarding § 11321(a), the judge straightforwardly reasoned that the claims would prevent the trackage rights agreement from being carried out as exempted. Canadian Pacific had "not presented any argument to the contrary."
The court then requested supplemental briefing on the expenses issue. During the period of supplemental briefing Canadian Pacific still did not try to amend its complaint to add the necessary facts that Consolidated Rail had consistently identified as missing. Without an allegation that Consolidated Rail had used the track after 1999, the district court concluded that Canadian Pacific failed to state a plausible breach of contract claim. Finally, the remaining defendants asked the court to dismiss them alongside the others. The court agreed and entered final judgment.
On appeal, Canadian Pacific challenges the breadth of the district court's preemption analysis, which it asserts deprives minority shareholders of any remedy for corporate malfeasance even tangentially related to trackage rights. The defendants, for their part, center their defense of the judgment on § 11321(a) and, specifically, Canadian Pacific's failure to...
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