Bnsf Railway Company v. Panhandle Northern Railroad Llc

Brief/Memorandum in Support

N.D. Tex.January 27, 2017

IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF TEXAS FORT WORTH DIVISION BNSF RAILWAY COMPANY, § § Plaintiff, § § v. § § CIVIL NO. 4:16-cv-01061-O PANHANDLE NORTHERN § RAILROAD, LLC, § § Defendant. § DEFENDANT’S REPLY BRIEF IN SUPPORT OF RULE 12(b)(6) MOTION TO DISMISS Michael C. Wright Texas Bar No. 22049807 mwright@rwtrial.com Steven L. Russell Texas Bar No. 17437040 srussell@rwtrial.com RUSSELL & WRIGHT, PLLC 15770 Dallas Parkway, Suite 1050 Dallas, Texas 75248 (972) 267-8400 (office) (972) 267-8401 (fax) Michael J. Barron, Jr. Illinois Bar No. 6228809 mbarron@fletcher-sippel.com Peter C. McLeod Illinois Bar No. 6278012 pmcleod@fletcher-sippel.com Fletcher & Sippel, LLC 29 North Wacker Drive, Suite 920 Chicago, Illinois 60606 (312) 252-1500 (office) (312) 252-2400 (fax) Attorneys for Defendant Case 4:16-cv-01061-O Document 28 Filed 01/27/17 Page 1 of 12 PageID 1148 1 BNSF’s claims in this case depend wholly on its position that the handling carrier relationship created by the Agreement could not be terminated by PNR. In BNSF’s world, PNR paid a discounted price for the assets it purchased in 1993 and, as a result, is forever indebted to BNSF. In BNSF’s world, PNR can never repay this debt other than by serving -- perhaps perpetually -- as BNSF’s handling carrier, regardless of the economic impact on PNR. These “alternative facts” are inconsistent with the actual facts pleaded in the amended complaint and applicable law. The 1993 transaction was an asset sale for stated, specific consideration. That consideration did not include any discount for the franchise value or going concern value of the rail line or the rail freight business included in the assets (which the parties call the Borger Line). Nor did the stated, specific consideration include any promise by PNR to act as BNSF’s handling carrier for any particular period of time. Despite BNSF’s conclusory allegations of its1 intent in 1993, the Agreement, which includes a merger clause, does not say BNSF would not have sold the Borger Line to PNR without agreement from PNR to serve, forever, as BNSF’s handling carrier. Had these terms been material to BNSF, it could have included them in the Agreement. It did not. PNR served as a handling carrier for BNSF for over 23 years. Because the economics of the relationship were no longer fair, PNR gave notice to BNSF many months in advance of its intent to terminate the handling carrier relationship. Distraught at the prospect of losing what it apparently believed to be an indentured servant, BNSF filed this suit. The viability of its claims requires a finding that the handling carrier relationship created by the Agreement would continue until BNSF decided to terminate it -- even if this meant forever. BNSF’s position is not supported by the law and its claims should be dismissed for failure to state a claim. 1 The 1993 agreement was between PNR and BNSF’s predecessor in interest, The Atchison, Topeka and Santa Fe Railway Company. Because there is no dispute that BNSF succeeded to the Santa Fe’s interest in the 1993 agreement, this brief references BNSF instead of Santa Fe with respect to events occurring before the Burlington Northern - Santa Fe merger. Case 4:16-cv-01061-O Document 28 Filed 01/27/17 Page 2 of 12 PageID 1149 2 There is no dispute the Agreement is of indefinite duration. Significantly, BNSF does not point the Court to any post-closing termination provision in the Agreement. Nor does BNSF claim the handling carrier relationship created by the Agreement had a specified duration. Instead, BNSF attempts to impose a “forever term” on that relationship by saying “the terms of the Agreement confirm the parties’ intent for PNR’s obligation to act as BNSF’s handling carrier to continue as long as BNSF serves its customers on the Borger line”2 -- in other words, as long as BNSF wants. In support of this bold statement, BNSF referred the Court to all 107 pages of the Agreement. BNSF did not, because it cannot, provide the Court with pinpoint citations to any portions of the Agreement stating such an intent by the parties. It is clear, however, that BNSF does not contend the Agreement had a specified term. No facts are alleged in the amended complaint that would require any finding other than the Agreement was of indefinite duration. There are no properly pleaded facts showing an intent to create an agreement that could not be terminated at will. Unable to identify a specific duration for the relationship, BNSF contends the Agreement cannot be terminated by PNR because (1) the parties intended it would not be terminable at will and (2) BNSF has fully performed and it would be “illogical” to allow PNR to terminate. Neither contention has merit. First, with respect to the parties’ intent, BNSF makes conclusory allegations that the “primary consideration received by BNSF [for the transaction] was PNR’s agreement to act as BNSF’s handling carrier” and that “BNSF would not have sold the Borger Line to PNR absent PNR’s agreement to act as BNSF’s handling carrier.” These allegations are parol evidence that cannot vary the express terms of the Agreement. The Agreement includes an integration provision, stating that the “document, together with all exhibits attached [t]hereto, constitutes the entire agreement between PNR and [BNSF] relating to the transactions covered by this Agreement.” AGREEMENT, § IV(3) [APP. 041]. Under Illinois law, parol evidence is generally not admissible to vary the terms 2 BNSF’S RESPONSE [ECF No. 26], at 8. Case 4:16-cv-01061-O Document 28 Filed 01/27/17 Page 3 of 12 PageID 1150 3 of a written contract. Davis v. Buchholz, 428 N.E.2d 198, 201, 101 Ill.App.3d 388, 391 (Ill. App. 3d Dist. 1981). There are exceptions, such as for ambiguous provisions or conditional delivery, but none are alleged by BNSF or otherwise applicable. The handling carrier relationship was created by Section III of the Agreement, which does not contain a time period for that relationship or any statement of an intent of the parties that the relationship would “continue as long as BNSF serves its customers on the Borger Line.” The parties could have stated a term for the handling carrier relationship, such as 25 years or even 99 years. They did not. The parties could have described the Purchase Price for the assets as some amount of cash, plus an agreement by PNR to act as a handling carrier. They did not. The parties could have agreed the Purchase Price was not the full franchise value or going concern value for the assets, but was discounted to account for an agreement by PNR to act as a handling carrier. They did not.3 There is nothing in the Agreement showing an intent by the parties that the handling carrier relationship would last any particular length of time. BNSF’s “intent” argument has no merit. The Agreement was executory because BNSF had continuing obligations. BNSF next contends it has completely performed its obligations under the Agreement and is now entitled to perpetual performance from PNR. These claims are inconsistent with BNSF’s amended complaint and the Agreement, which show BNSF owed continuing performance under the Agreement: • “the Agreement grant[s] BNSF the authority to establish through rail routes and to offer through rail freight rates for interline freight transportation service offered by PNR and BNSF so long as PNR receives the agreed upon amount of revenue for transporting the traffic” [ECF No. 5, at ¶ 11 (emphasis supplied)] • “BNSF physically interchanges rail traffic with PNR to serve BNSF customers from the Borger Line” [ECF No. 5, at ¶ 13] 3 BNSF says in its response, without any citation to its amended complaint, that “even PNR acknowledges that the sale price of the Borger Line reflected a significant discount in exchange for PNR’s promise to act as BNSF’s handling carrier.” ECF No. 26, at 13. There is no pleading to support this statement. Nor is it true. Case 4:16-cv-01061-O Document 28 Filed 01/27/17 Page 4 of 12 PageID 1151 4 • “BNSF in turn pays PNR an agreed upon division payment on a per rail car basis.” [ECF No. 5, at ¶ 14] • “[BNSF] shall submit freight bills for, and shall collect all revenues due for, all shipments originating or terminating on the Borger Line which move via any of the Through Routes” AGREEMENT, § III(3)(a) [APP. 037] • “PNR shall assess and collect all charges due for all switching charges; all demurrage and miscellaneous charges; and all freight charges, where [BNSF] does not participate in the line haul movement … If any such payments are made directly to [BNSF] for services provided by PNR, [BNSF] shall remit such payments to PNR.” AGREEMENT, § III(3)(b) [APP. 037] • “[BNSF] agrees to haul locomotives between Panhandle, Texas, on the one hand and, on the other hand, Denver, Colorado, Wichita, Kansas or Kiowa, Kansas” AGREEMENT, § III(5) [APP. 038] • “[BNSF] shall make reasonable and good faith efforts to make empty rail freight cars available on interchange tracks as needed by PNR for rail freight shipments for which [BNSF] receives line haul revenue …” AGREEMENT, § III(6)(a) [APP. 038-39] These examples of BNSF’s post-closing obligations under the Agreement clearly show this was not a transaction in which BNSF simply conveyed assets (the Borger Line and related freight business) in exchange for perpetual handling carrier service by PNR, with no further performance required by BNSF. Rather, the 1993 transaction was a sale of assets, for which BNSF received the full purchase price, followed by a post-closing relationship between the parties that was terminable at will. BNSF’s “complete performance” argument myopically focuses on the asset sale and ignores the bilateral performance obligations of the parties under the post-closing handling carrier relationship created by the Agreement. The asset sale was the subject of Section I of the Agreement, which very specifically expresses a “total purchase price” for the sale.4 Notably, the “total purchase price” stated in the Agreement for the sale of these assets to PNR did not include any future payments or revenue division, or any agreement by PNR to act as BNSF’s handling carrier for any specific period of time. Instead, the Agreement stated a very specific sum of cash for the asset sale. That sum was paid by PNR to the Santa Fe and the conveyance closed in 1993. A quitclaim deed was executed and recorded. That deed conveyed to PNR, “free and clear of all liens,” all of the Santa 4 AGREEMENT, at §§ I(2)(a) and (b) (APP. 008-09). Case 4:16-cv-01061-O Document 28 Filed 01/27/17 Page 5 of 12 PageID 1152 5 Fe’s rights and interests in the real property included in the Borger Line.5 Although the quitclaim deed included a nonexclusive license giving BNSF certain rights to use a specified portion of the Borger Line, it did not include any requirement that PNR act as a handling carrier for BNSF. Simply put, the asset sale in the Agreement was fully performed by both parties upon payment of the specified consideration and delivery of the specified conveyance documents. With respect to the handling carrier relationship, performance was required by both parties after closing of the asset sale and BNSF’s “complete performance” argument fails because the Agreement was executory for both parties after closing. Executory contracts of indefinite duration are terminable at will. Illinois law, which BNSF concedes governs the Agreement, clearly provides that executory contracts of indefinite duration are terminable at will. Jespersen v. Minn. Min. and Mfg. Co., 183 Ill.2d 290, 291, 700 N.E.2d 1014, 1015 (1998); Rico Indus., Inc. v. TLC Group, Inc., 6 N.E.3d 415, 420, 2014 IL App (1st) 131522, at ¶19 (Ill. App. Ct. 1st Dist. 2014). BNSF attempts to avoid application of settled Illinois law by claiming PNR’s interpretation of the Agreement is “illogical” because PNR could have terminated the Agreement the day after closing and thereby deprive BNSF of the benefit of its bargain. Termination of the handling carrier relationship the day after closing might have been illogical if that relationship was a stated part of the consideration for the asset sale. It was not. BNSF’s conclusory allegation that the “primary consideration” for the asset sale was PNR’s agreement to act as BNSF’s handling carrier has no support in the Agreement. The primary consideration for the asset sale was expressly stated in the Agreement -- a sum of cash that no party disputes was paid by PNR. Moreover, this straw man argument has no relevance to the facts alleged by BNSF, given that the amended complaint clearly alleges more than 23 years of post-closing performance by PNR. BNSF’s argument that Jespersen and Rico Industries cases do not apply when a party seeks to avoid 5 The form of quitclaim deed used by the parties was attached to the Agreement as Exhibit A. APP., at 047-056. Case 4:16-cv-01061-O Document 28 Filed 01/27/17 Page 6 of 12 PageID 1153 6 its obligations ab initio do not apply here. Termination of the handling carrier relationship after 23 years can hardly be said to be terminating that relationship ab initio. BNSF’s position is built around cases involving complete performance by one party or agreements with termination clauses. The cases BNSF cites to avoid a finding the Agreement was terminable at will are distinguishable because they involve complete performance by one party or agreements that contain termination provisions. In Yale Security, Inc. v Freedman Sales, Ltd., 165 F.3d 34, 1998 WL 690944 (7th Cir. 1998), and McDonald v. Scitec, Inc., 79 A.3d 374 (Me. 2013), the plaintiffs were salesmen who fully performed by introducing customers to the defendants, who were product sellers. In each case, the agreement was to pay the salesman commissions for the introduction. Nothing more was required by the salesmen, whose performance was complete when the introductions were made. BNSF recognizes that application of Yale and McDonald depends on complete performance by one party, stating “Each case confirms that when one party has fully performed, so must the other.” ECF No. 26, at 11, n. 32. Yale and McDonald do not help BNSF, because, as noted above, it had not fully performed all its obligations under the handling carrier relationship created by the Agreement. The contract in Yale can be further distinguished from the Agreement in this case by the fact the Yale contract had a termination clause. Noting that provision, the Yale court held the contract was not terminable at will because the termination clause provided a “reference to specific, external events” that determined the term of the agreement. 1998 WL 319487 at *3. The Agreement here contained no such provision. BNSF’s reliance on Baldwin Piano, Inc. v. Deutsche Wurlitzer GmbH, 392 F.3d 881 (7th Cir. 2004), is also misplaced as the agreement in that case (a trademark license) included a termination provision, which the Seventh Circuit specifically found made the agreement not terminable at will. 392 F.3d at 884. See also A.T.N., Inc. v. McAirlaid’s Vliesstoffe GmbH & Co., KG, 557 F.3d 483, 488 (7th Cir. 2009)(“This court in Baldwin found that a contract permitting termination only after a material Case 4:16-cv-01061-O Document 28 Filed 01/27/17 Page 7 of 12 PageID 1154 7 breach and failure to cure within a specified period was not terminable at will.”). The Agreement between BNSF and PNR does not include any provision for termination of the parties’ post-closing relationship and the cases cited by BNSF are inapplicable. BNSF cites Maimon v. Telman, 240 N.E.2d 652, 654, 40 Ill.2d 535 (Ill. 1968), for the proposition that “The absence of a termination date in an agreement does not necessarily void the contract.” This dicta is not relevant. The issue here is whether the handling carrier relationship created by the Agreement is terminable at will. PNR has not sought to void the Agreement.6 Texas law has no bearing on whether the Agreement is terminable at will. Although it concedes the Agreement chose Illinois law, BNSF tries to double track its argument by citing an 85 year old Texas court of appeals opinion about a bus route that required a state permit. That case, Kennedy v. McMullen, 39 S.W.2d 168 (Tex. Civ. App. – Beaumont 1931, writ ref’d), has no application here because there was complete performance by one party, unlike this case. The dispute in Kennedy started with competing applications for a state permit to operate a bus line between Lufkin and Beaumont, Texas. At the request of the Texas Railroad Commission, the parties resolved the issue by having one party (McMullen) waive his permit application in exchange for an agreement by the other party (Kennedy and others) to pay McMullen a portion of the fare revenue from passengers on the bus line. Although McMullen completely performed by waiving his application, Kennedy stopped paying McMullen about a year later, claiming their agreement was terminable at will because it did not state a term. The Kennedy court disagreed. Although Texas law is not controlling, the Kennedy opinion does not change the outcome in this case for the same reason as the Yale, McDonald, and Baldwin Piano cases cited by BNSF -- all these cases, and Kennedy, involve complete performance by one party. BNSF’s amended complaint and the Agreement show BNSF had not completely performed all its obligations under the handling carrier 6 It is also noteworthy that the Maimon court found the agreement before it terminable at will based on the partnership law principle that a partnership agreement without a termination date is terminable at the will of either partner. 240 N.E.2d at 655, 40 Ill.2d at 538-39. Case 4:16-cv-01061-O Document 28 Filed 01/27/17 Page 8 of 12 PageID 1155 8 relationship created by the Agreement. Terminable at will contract cases that turn on complete performance by one party are not determinative in this case. There was no waiver, estoppel, or release. BNSF makes conclusory allegations that PNR waived, is estopped from asserting, or released any claim to terminate the Agreement. The only facts pleaded to support these conclusory allegations are that PNR represented in the Agreement that its obligations were legal, valid, and binding and that PNR entered into eight amendments to the Agreement. The Agreement, and its amendments, are in the record. Other than the representation that PNR’s obligations were legal, valid, and binding, the amended complaint points to no part of the Agreement or its amendments in which PNR specifically waived or released any right to terminate the handling carrier relationship. The settlement agreement7 referenced by BNSF contains mutual releases of all claims arising out of the Agreement prior to the date of the settlement, but nothing purporting to release any right to terminate the handling carrier relationship. Nor does the amended complaint contain any facts, as compared to conclusory allegations, that would show waiver, estoppel, or release. BNSF’s conclusory allegations are not sufficient. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). Ratification of the Agreement did not alter its terminable at will status. BNSF contends that ratification of the Agreement over the years binds PNR to the Agreement even if it were terminable at will. The only case cited by BNSF on this issue, Bull v. Mitchell, 448 N.E.2d 1016, 144 Ill.App.3d 177 (Ill.App. 3rd Dist. 1983), stands for the proposition that a principal who ratifies an unauthorized contract is bound by it. PNR does not contend the Agreement was unauthorized. The Bull case did not hold that ratification of an indefinite duration agreement, whether authorized or not, changes the agreement’s status from terminable at will. The Bull case has no applicability. 7 APP., at 142-47. Case 4:16-cv-01061-O Document 28 Filed 01/27/17 Page 9 of 12 PageID 1156 9 Illinois law applies to BNSF’s tortious interference claim. Finally, BNSF claims Texas law applies to its tortious interference claim because its tort claims “are separate from the Agreement and do not involve construction of the Agreement.” ECF No. 26, at 21. Although BNSF does not frame its argument this way, the gist of the cases cited by BNSF is that “narrow” choice of law provisions do not apply to extra-contractual claims.8 But, BNSF’s reliance on this line of cases is misplaced because its tortious interference claim involves construction of the Agreement and is dependent upon the Agreement. In Fairmont Supply Co. v. Hooks Indus., Inc., 177 S.W.3d 529, 536 (Tex.App. - Houston [1st Dist.] 2005, pet. denied), the court found that a narrow choice of law provision applied to a claim that was “inextricably intertwined with the substantive issue of contractual liability.” The claim in that case “rose or fell” with performance, or non-performance, of the contract at issue and “[arose] directly from a breach of the contract containing the choice-of-law provision.” Id. at 535. In addition to Texas law, BNSF cites Illinois case law on this choice of law issue. The tort claims in Access2go, Inc. v. Hipage Co, Inc., 2010 WL 55907 (C.D. Ill. 2010) did not involve construction of the contract at issue in that case. In the other Illinois case cited by BNSF, Medline Indus. Inc. v. Maersk Medical Ltd., 230 F.Supp.2d 857 (N.D. Ill. 2002), the court noted that “tort claims that are dependent upon the contract are subject to [the] contract’s choice-of-law clause regardless of the breadth of the clause.” Id. at 862. “A tort claim is ‘dependent’ upon the contract if ‘(1) the claim alleges a wrong based on the construction and interpretation of the contract; (2) the tort claim is closely related to the parties' contractual relationship; or (3) the tort claim could not exist without the contract.’” Cunningham Charter Corp. v. Learjet, Inc., 870 F.Supp.2d 571, 577 (S.D. Ill. 2012)(quoting Amakua Dev. LLC v. Warner, 411 F.Supp.2d 941, 956 (N.D.Ill.2006). All three of 8 Cf. Benchmark Elect., Inc. v. J.M. Huber Corp., 343 F.3d 719, 727 (5th Cir.)(choice of law provision that stated the agreement “shall be governed by, and construed in accordance with, the internal laws of the State of New York” did not apply to extra-contractual claims of fraud and negligent misrepresentation), modified on other grounds on denial of reh’g by 355 F.3d 356 (5th Cir. 2003). Case 4:16-cv-01061-O Document 28 Filed 01/27/17 Page 10 of 12 PageID 1157 10 these conditions are met in this case and the Illinois cases (Access2go and Medline) cited by BNSF do not require application of Texas law to BNSF’s tortious interference claims. Here, BNSF’s tortious interference claim is inextricably intertwined, and dependent upon, its contract claims. The alleged interference is PNR’s termination of the Agreement, and communications with third-parties about that termination. If the Agreement was terminable at will under the law chosen by the parties for construction of the contract (Illinois), then any alleged tortious interference through exercise of that right was “inextricably intertwined with the substantive issue of contractual liability,” as the claim “arises directly from a breach of the contract containing the choice-of-law provision.” Fairmont Supply, 177 S.W.3d at 535-36. Illinois law should be applied to BNSF’s tortious interference claim. As set forth in PNR’s motion to dismiss, the amended complaint fails to state a claim for tortious interference under Illinois law. Request for Relief The amended complaint fails to state a claim upon which relief can be granted. Defendant Panhandle National Railroad, LLC respectfully requests its motion to dismiss be granted in all respects. Defendant further requests such other and further relief to which it may be justly entitled. Respectfully submitted, /s/ Michael C. Wright Michael C. Wright Texas Bar No. 22049807 mwright@rwtrial.com Steven L. Russell Texas Bar No. 17437040 srussell@rwtrial.com RUSSELL & WRIGHT, PLLC 15770 Dallas Parkway, Suite 1050 Dallas, Texas 75248 (972) 267-8400 (office) (972) 267-8401 (fax) Case 4:16-cv-01061-O Document 28 Filed 01/27/17 Page 11 of 12 PageID 1158 11 -and - Michael J. Barron, Jr. Illinois Bar No. 6228809 mbarron@fletcher-sippel.com Peter C. McLeod Illinois Bar No. 6278012 pmcleod@fletcher-sippel.com Fletcher & Sippel, LLC 29 North Wacker Drive, Suite 920 Chicago, Illinois 60606 (312) 252-1500 (office) (312) 252-2400 (fax) ATTORNEYS FOR DEFENDANT CERTIFICATE OF SERVICE The undersigned hereby certifies that a true and correct copy of the foregoing document was served on the following counsel of record via electronic transmission, on January 27, 2017: David J. Drez III Charles C. Keeble Jr. Zachary C. Farrar Wick Phillips Gould & Martin LLP 100 Throckmorton Street, Suite 500 Fort Worth, Texas 76102 /s/ Michael C. Wright Michael C. Wright Case 4:16-cv-01061-O Document 28 Filed 01/27/17 Page 12 of 12 PageID 1159