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Bnsf Railway Company, A Delaware Corporation v. San Joaquin Valley Railroad Company

April 18, 2012

BNSF RAILWAY COMPANY, A DELAWARE CORPORATION, PLAINTIFF,
v.
SAN JOAQUIN VALLEY RAILROAD COMPANY, A CALIFORNIA CORPORATION, TULARE VALLEY RAILROAD COMPANY, A NEVADA CORPORATION, DEFENDANTS.



MEMORANDUM OPINION AND ORDER ON CROSS- MOTIONS FOR SUMMARY JUDGMENT OR SUMMARY ADJUDICATION Doc's No. 121, 127 and 128 and

This is an action for breach of contract by plaintiff BNSF Railway Company ("BNSF" or "Plaintiff") against defendants San Joaquin Valley Railroad Company ("SJVR") and Tulare Valley Railroad Company ("TVRR") (collectively, "Defendants"). The currently-operative First Amended Complaint ("FAC") was filed by BNSF on November 6, 2009. On November 30, 2009, SJVR filed an answer to the FAC that incorporated counterclaims against BNSF for declaratory judgment on breach of contract and damages. Currently before the court are cross-motions for summary judgment or summary adjudication by BNSF, Doc. # 121, TVR, Doc. # 128, and SJVR, Doc. # 127. TVRR, in its motion for summary judgment seeks its own dismissal from this action. The court will consider TVRR's motion first and will then proceed to the cross-motions of SJVR and BNSF. Diversity Jurisdiction exists pursuant to 28 U.S.C. § 1332. Venue is proper in this court.

TVRR'S MOTION FOR SUMMARY JUDGMENT

I. Factual Background

BNSF's FAC alleges that its predecessor, the Atchison, Topeka and Santa Fe Railroad Company (hereinafter "Santa Fe"), entered into an agreement with TVRR in November 1992 leasing and selling "designated rail lines between Bakersfield and Fresno, California (the "1992 Agreement").*fn1 Shortly thereafter, TVRR entered into a service agreement with SJVR wherein the latter carried out most of the operations and received a set proportion of the tariffs paid to TVRR by BNSF. BNSF alleges that it set routes and rates for freight originating from or delivered to stations covered by the 1992 Contract according to the terms of the 1992 Agreement. Until April 1, 1994, TVRR paid SJVR from the funds that were collected by BNSF and paid to TVRR according to a percentage that was agreed upon between TVRR and SJVR. Beginning on April 1, 1994, BNSF paid SJVR directly as a result of a letter of agreement between SJVR and BNSF. In 1999 TVRR sold almost all of its assets to SJVR retaining only a 6-mile rail spur referred to by the parties as the "Ultra to Ducor line" or as the "Ultra Spur." TVRR contends that the 1999 transfer of assets to SJVR included any claims TVRR may have had against BNSF. BNSF's FAC alleges that SJVR was acquired by Fortress Investment Group LLC in 2007 and that this action was occasioned by the new owner's contentions that BNSF had breached the terms of the 1992 Agreement and the demand by the new owners for retroactive application of substantially higher rates. TVRR contends it is neither a proper nor necessary party in this action because it has no interest in the outcome because all rights and duties it may have that are at issue in this action have been assigned to SJVR as a result of the 1999 sale.

II. Analysis of Parties Arguments

The FAC alleges a single claim against TVRR for declaratory judgment in which BNSF requests that the court declare the rights of the parties with regard to whether:

An actual, justiciable, present and continuing dispute and controversy exists between BNSF and [D]efendants regarding whether Paragraphs 29 and 30 of the [1992 Agreement] are enforceable, whether [D]efendants are obliged to be included in BNSF through routes and to concur in BNSF though rates, and whether BNSF has complied with all other contractual obligations, including those governing the revenue arrangement for direct dealings between SJVR and BNSF.

Doc. # 85 at ¶ 48. The FAC alleges the court "is empowered and obligated, pursuant to [the Declaratory Judgment Act,] 28 U.S.C. § 2201 to declare the rights and obligations" of the parties with respect to the 1992 Contract.

TVRR has alleged no counterclaims against BNSF and seeks summary judgment on the ground there exists no dispute between TVRR's and BNSF. BNSF opposes TVRR's motion for summary judgment primarily on two grounds. First, BNSF contends the 1999 transfer of assets from TVRR to SJVR (hereinafter the "1999 Transfer") did not effectuate a transfer of obligations owed by TVRR to SJVR from 1992 to 1999 under the 1992 Agreement. BNSF does not specify what those residual obligations might be. BNSF also contends that TVRR remains owner of the Ultra Spur to the present time and is bound by the terms of pre-existing agreements with regard to freight traffic over that spur. BNSF therefore contends that TVRR is a proper party because it will be bound by any judgment in this action that declares rights under the 1992 Agreement with regard to either TVRR's obligations prior to 1999 under the 1992 Agreement or since 1999 with regard to any obligations arising from its ownership of the Ultra Spur. Second, BNSF contends that BNSF's rights in this action arise from the 1992 Agreement to which TVRR is a signatory and therefore TVRR is an indispensable party.

A. Declaratory Judgment Act and "Actual Controversy"

BNSF quotes extensively from the 1992 Agreement which, in Paragraph 8, provides certain limitations on the rights of the parties to assign rights and obligations under the Agreement to an assignee or purchaser. The paragraph quoted by BNSF provides that an assignment of rights to a successor requires that the assignee specifically "assume in writing all of Buyer's or Seller's continuing and existing or thereafter arising obligations under this agreement. . . ." Doc. # 151 at 7:20-21. BNSF further highlights Paragraph 8's provision that, although a party to the 1992 Agreement can assign rights and obligations existing at the time of the assignment or accruing thereafter, the assigning party "shall remain responsible after the assignment for those obligations existing up until the time of the assignment. . . ." Id. at 24-25.

As an initial matter, the court notes that there are no allegation of the existence of obligations owing by TVRR to BNSF under the 1992 Agreement for any of TVRR's activities between 1992 and the assignment of TVRR's interests to SJVR. In addition, other than TVRR's retention of the Ultra Spur line, there is no allegation of any obligation owed by TVRR to BNSF arising after the 1999 assignment to SJVR. There is also no contention by BNSF, that following TVRR's assignment of its interests to SJVR in 1999, TVRR retained any interest in SJVR's potential recovery against BNSF as a consequence of SJVR's counterclaims against BNSF. BNSF contends that, because the 1992 Agreement imposes a continuing obligation on TVRR to be responsible for obligations that accrued prior to the date of any assignment and assumption of obligations by SJVR, TVRR's rights and obligations will be affected by BNSF's action for declaratory relief. BNSF gives no explanation as to how or why TVRR's rights and obligations would be affected other than to posit the hypothetical existence of a potential obligation.

"The Declaratory Judgment Act provides that, '[i]n a case of actual controversy within its jurisdiction . . . any court of the United States . . . may declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought.' 28 U.S.C. § 2201(a)." Medimmune, Inc. v. Genentech, Inc., 549 U.S. 118, 126, 127 S.Ct. 764, 770 (2007). The Medimmune Court directly addressed the issue of what constitutes an "actual controversy" under the Declaratory Judgment Act. The court held that:

[T]he dispute [must] be "definite and concrete, touching the legal relations of parties having adverse interests"; that it be "real and substantial" and admit of specific relief through a decree of a conclusive character, as distinguished from an opinion advising what the law would be upon a hypothetical state of facts." [Aetna Life Ins. v. Haworth, 300 U.S. 227, 240-241 [. . .] (1937). In Maryland Cas. Co. v. Pacific Coal & Oil Co., 312 U.S> 270, 273 [. . .](1941), we summarized as follows: "Basically, the question in each case is whether the facts alleged, under all the circumstances, show that there is a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment." Id. at 126.

TVRR contends that no "actual controversy" exists between it and BNSF. The court agrees. Medimmune and its progeny require something more than the simple fact of a contract to which both the plaintiff and defendant are signatory. There must be an actual opposition of legal interests that has ripened into an actual controversy. Here, TVRR has not threatened to sue BNSF under the 1992 Agreement and has, in fact, stated its lack of any interest in the case at all. BNSF has not pointed to any issue of actual opposition between itself and TVRR under the 1992 Agreement. With regard to the six-mile Ultra Spur line, discovery has been had, as TVRR points out, and BNSF remains unable to point to any traffic over that spur that occurred since the 1999 transfer of assets to SJVR that would implicate any obligations or rights as between TVRR and BNSF. BNSF's argument that TVRR is a proper defendant in this action implies that, should BNSF prevail in its action for declaratory judgment, the terms of the 1992 Agreement will apply to freight traffic on TVRR's spur line. TVRR has not contended otherwise nor does BNSF point to any action or representation by TVRR that would indicate even the least probability that TVRR is in a position of "substantial controversy" over BNSF's implied contention.

B. Indispensable Party

BNSF cites a number of cases for the proposition that, as a signatory to the 1992 Agreement, TVRR is an indispensable party to this proceeding. Each of the cases BNSF cites, however, concern the application of joinder of indispensable parties under Rule 19 of the Federal Rules of Civil Procedure. The issue at hand is not one of joinder under Rule 19, however, because TVRR is already a party. The more appropriate question is whether, and under what conditions, a party that is a signatory to a contract that is the focus of an action for declaratory judgment may be dismissed from the action. Even though the issue at hand is not one of joinder, Rule 19 provides necessary insight into the question of whether a party can be forced to maintain its status as a plaintiff or defendant when it seeks to be excused from the proceeding. Rule 19(a) describes the attributes of a person who must be joined if possible. That person is "a person in whose absence complete relief cannot be accorded among those who are already parties by affording them a complete adjudication of their dispute." Japan Petroleum Co. Ltd. v. Ashland Oil, Inc., 456 F.Supp. 831, 836 (D. Del. 1978). The policy objectives of Rule 19's requirement to join all "indispensable parties" are to "protect the interests of the parties by affording them complete adjudication of their dispute. It [also] serves the interest of judicial economy by avoiding repeated lawsuits involving the same subject matter." Id.

While BNSF correctly notes that "[g]enerally, where rights sued upon arise from a contract, all parties thereto must be joined," Regan Henry Broad. Grp., Inc. v. Hughes, 1992 WL 151308 (E.D. Pa. 1992), the status of a party as indispensable does not arise as a result of its being signatory to a contract, it's status as indispensable is the result of the needs of the other parties to fully adjudicate their claims. There is no policy purpose to be served by compelling a party to maintain its status in an action as plaintiff or defendant where a party, having been joined, is later able to show upon all the evidence that its presence in the action is not necessary to the interests of either party in litigating their claims. TVRR contends that its presence in this action is not necessary to the claims of either party and the court agrees. As discussed above, in an action for declaratory judgment, BNSF can only achieve judgment over a party against whom it an actual, present and substantial controversy. This controversy exists between BNSF and SJVR. BNSF has the burden under the Declaratory Judgment Act to show it has an "actual controversy" against all Defendants and, as the court has noted, has failed to carry that burden with respect TVRR.

BNSF's action is essentially a preemptive strike against SJVR's claims of breach and SJVR's effort to retrospectively enforce through rates according to its determination. TVRR, by asserting no counter-claims against BNSF cannot, now or in the future, assert claims against BNSF that it has specifically decided not to assert in this action. Therefore, BNSF has no claims that it can assert preemptively against TVRR by means of its declaratory judgment claims. Similarly, TVRR has assigned to SJVR all its rights under the 1992 Agreement and has asserted no claims on its own behalf relating to the sole remaining interest it owns in the Ultra Spur line. Stated another way, SJVR's counterclaims against BNSF are based on rights that have already been assigned by TVRR to SJVR. As a consequence, TVRR's participation is not necessary in order for SJVR to fully litigate its claims.

Because neither BNSF nor SJVR require the participation of TVRR to fully litigate their claims in this action, and because in seeking dismissal from this action TVRR is estopped from asserting any claims under the 1992 Agreement against BNSF, the court concludes that TVRR is not an indispensable party to this action. Because TVRR is not an indispensable party and because BNSF has not carried its burden to show that an "actual controversy" exists between it and TVRR, the court concludes that TVRR is entitled to judgment against BNSF as to BNSF's first claim for relief. TVRR will therefore be dismissed from this action.

BNSF'S CLAIMS AND SJVR'S COUNTERCLAIMS

The FAC lists four claims for relief. The first two claims seek declaratory judgment against SJVR on SJVR's claim that BNSF breached its duties under the fee-setting provisions of the 1992 Agreement, and declaratory judgment on SJVR's claim that BNSF breached its duties under the 1994 Letter of Agreement, respectively. BNSF's third and fourth claims for relief allege that SJVR breached the rate setting provisions of the 1992 Agreement and the 1994 Letter of Agreement, respectively, by attempting to set rates unilaterally and by attempting to recover from BNSF alleged underpayment of rates that SJVR alleges were wrongfully not increased since 1994.

SJVR's answer to the FAC alleges four counterclaims. The first two counterclaims allege breach of the 1992 Agreement by BNSF arising from BNSF's failure to notify TVRR or SJVR of through rate changes, as required by paragraph 31 of the Agreement, and to increase the division of revenues according to the upward movement of through rates, respectively. SJVR's third counterclaim seeks declaratory judgment on the issue of whether SJVR has sole discretion to set rates under the 1992 Agreement in light of BNSF's breaches.

SJVR's fourth counterclaim alleges breach of the 1992 Agreement by BNSF arising from BNSF's refusal to pay rates unilaterally set by SJVR in 2008 under the rate-setting authority claimed by SJVR under the 1992 Agreement.

Somewhat atypically, the motions for summary judgment consist basically of two opposing propositions regarding SJVR's counterclaims against BNSF. SJVR seeks summary judgment in its favor and BNSF seeks summary judgment on SJVR's counterclaims in its favor. Neither party appears to have moved for summary judgment as to the claims alleged in BNSF's FAC.

I. The 1992 Agreement and Subsequent Agreements

At the core of the dispute between the two remaining parties is the question of what provisions of which agreement provide the basis for the revenues that were paid to SJVR from 1992 to 1999, and from 1999, when SJVR purchased most of TVRR's interest, to 2008, when this action was commenced. SJVR contends that BNSF's authority to set rates, and SJVR's duty to concur in those rates, was conditioned under the terms of the 1992 Agreement on BNSF's performance of its duty under that agreement to report at year's end the percent of increase or decrease in the through rates charged by BNSF for freight arriving at, or originating from, the stations listed in Table 1 and to apply that ...


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