Norfolk Southern Railway Co. v. Pittsburgh & West Virginia Railroad
Docket: 2:11-cv-1588-TFM
Court: District Court, W.D. Pennsylvania; December 28, 2015; Federal District Court
Remaining claims in this case are for breach of contract and fraud, filed by Plaintiffs Norfolk Southern Railway Company and Wheeling Lake Erie Railway Company against Defendants Pittsburgh West Virginia Railroad and Power REIT. Plaintiffs seek injunctive relief and monetary damages. A non-jury trial took place from August 3 to August 6, 2015, where witness testimony and evidence were presented, and the matter is now ready for disposition.
Key findings include:
1. A lease dated July 12, 1962, was established between Pittsburgh West Virginia Railway Company and Norfolk and Western Railway Company, granting Norfolk and Western rights to certain properties, including a 112-mile rail line and 20 miles of branch lines.
2. Norfolk Southern Railway Company is the successor to Norfolk and Western's interest in this lease.
3. Wheeling Lake Erie Railway Company became the sublessee on May 17, 1990, taking on Norfolk and Western's obligations as lessee and becoming the principal operator of the rail line.
4. Pittsburgh West Virginia Railroad is a business trust succeeding the original railway company, while Power REIT is a real estate investment trust formed in 2011 that now wholly owns PWV.
5. The lease remains effective, with a term of 99 years, renewable perpetually at the lessee's option absent default. Rent is fixed at $915,000 annually, with additional considerations related to the properties.
6. The lease includes covenants binding PWV, including a requirement to maintain its corporate existence and restrictions on issuing stock without Norfolk Southern's written consent.
Section 8(a)(5) prohibits PWV from borrowing money or making advances, including any agreements to provide funds to debtors for the payment of principal, interest, or premiums on indebtedness. Section 8(b)(1) restricts PWV's ability to declare dividends, limiting them to amounts derived from nondemised property and rent payments, minus certain taxes and obligations incurred for stockholder benefit. Under the Sublease, Norfolk Southern transferred all rights and interests in the Lease to Wheeling Lake Erie for a period ending one year before the Lease's initial term concludes, with Wheeling Lake Erie assuming all obligations except for the "Settlement Account" balance owed to Lessor, which was approximately $16.6 million as of December 31, 2012. The Sublease mandates that Wheeling Lake Erie indemnify Norfolk Southern against liabilities incurred during the Sublease term.
Management changes at PWV include the relocation of administrative functions from International Mining to Port Amherst in 1996 and subsequently to West Babylon, New York, in 2011 under David Lesser's control. Lesser, with a background in investment banking and real estate, holds multiple leadership positions within PWV and related companies. He began acquiring shares in PWV around 2007 when the company's operations were primarily focused on receiving rent, covering corporate expenses, and paying dividends to shareholders.
Lesser viewed PWV as a promising investment due to its lack of debt, a single asset, and dividend payments, all identified through SEC public filings. However, he found PWV's structure—a publicly traded, single-purpose entity—unusual for a REIT, which typically has a publicly traded parent company and subsidiary partnerships owning real estate assets. Despite concerns, Lesser continued purchasing PWV shares for two years and expressed interest in becoming a Trustee in early 2009. In response, then-Chairman Mr. Jones Jr. informed him about the long-term lease with Norfolk Southern Corporation (NS) governing PWV, indicating that while NS was open to proposals, the current focus was on minimizing operating costs and maintaining four Trustees.
Later, after joining as a Trustee when a vacancy arose, Lesser learned that other Trustees believed the Lease restricted PWV’s ability to expand or incur debt without NS's consent, leading them to operate as a "captive entity" limited to rent and dividend payments. Dissatisfied, Lesser proposed a restructuring plan aimed at maximizing PWV’s value through expansion into alternative energy assets, seeking to escape the Lease's restrictions and leverage PWV's publicly traded status for capital access. Following the death of Chairman Mr. Jones Jr. on July 8, 2010, Lesser began articulating his vision for PWV's future to fellow Trustees.
Lesser proposed a corporate restructuring of PWV to address restrictions in the Lease, suggesting that PWV should become a wholly-owned subsidiary of a new parent company. He first articulated these ideas in an email to Mr. Jones III on July 22, 2010, following earlier discussions. In the email, Lesser expressed his ambition to become the new Chairman of the PWV Board of Trustees and outlined PWV's primary assets: the leased property and the public company, which he believed could be leveraged for growth. He identified three strategies for dealing with Lease restrictions: selling the property, restructuring PWV, or renegotiating the Lease terms. Lesser noted that the subsidiary would keep the existing restrictions, allowing the parent company to raise capital and pursue opportunities. Mr. Jones III appreciated Lesser's ideas but was concerned about their potential impact on shareholder distributions and the integrity of the Lease.
After this exchange, Lesser engaged in further discussions with Mr. Jones III and other Trustees to solicit feedback and educate them on REITs and PWV’s structure. By December 2010, Lesser was elected Chairman but noted that PWV lacked the working capital for activities beyond its basic operations. He criticized PWV's existence as a public company and single-purpose entity as unviable. On December 13, 2010, he sent a "PW Board Discussion Outline" to Wenger, detailing PWV's lack of debt, its two assets, and the ongoing challenges of being a public entity. He reiterated the need for restructuring due to Lease restrictions and highlighted the growing costs of public compliance, emphasizing that without expansion, remaining public offered no value.
The December 2010 Outline identified growth opportunities for PWV, including the use of its shell to finance special purpose assets and a focus on alternative energy assets, suitable for a REIT structure. It introduced the concept of "Power REIT," which aimed to invest in alternative energy assets like wind, geothermal, hydro, and solar. The outline proposed next steps, including renaming to Power REIT, initiating a rights offering for existing shareholders (requiring Lessee approval), pursuing ongoing transactions, hiring a deal person, and restructuring based on lease restrictions with assistance from Morrison Cohen, LLP, although an UPREIT structure was not adopted.
At the time of the Outline's preparation, PWV's Board had not made formal decisions regarding its future, but discussions continued. Lesser later engaged consultant Arun Mittal, who formally joined PWV as vice president, treasurer, and secretary in April 2011.
In early January 2011, Lesser presented a PowerPoint titled "PW BOARD DISCUSSION" to the Board, which included members Lesser, Wenger, Parsons, Jones, and Haynes. This presentation reiterated the growth strategies from the December Outline, asserting that PWV's assets were the Rail Line and Public Company Shell, and emphasized the necessity of restructuring due to lease restrictions. It outlined a vision for PWV as a leading Power REIT, detailing market opportunities, favorable dynamics, multi-year projections, and potential transactions involving wind farms.
Similar to the December Outline, the January Presentation outlined next steps that included plans for raising working capital through a rights offering, changing dividend policies, and pursuing transactions in progress, again indicating the need for Lessee approval for share issuance and plans for restructuring based on lease restrictions.
A proposal titled "NEXT STEPS: ILLUSTRATIVE STRUCTURE" outlined a reorganization of the existing REIT into Power REIT, represented as a parent holding company, while affirming that the current Lessor-Lessee relationship would remain unchanged. However, the reorganization did not occur. On January 3, 2011, Lesser and Mittal met with Wenger to discuss the proposals from the January 2011 Presentation, and Lesser followed up with an email emphasizing that the proposed business plan aimed to preserve and grow dividends without altering the existing lease. Subsequent communications indicated that Trustee Patrick Haynes, III was updated, and efforts were made to include Herb Jones, III in the process. Lesser circulated a "January Board Resolution" for approval of the outlined plan, which included a Rights Offer and retaining Morrison Cohen as counsel, alongside forming an Executive Committee. While Lesser and others signed the resolution, Jones, III signed but struck out two provisions without explanation. On January 5, 2011, Lesser sought written consent from Trustee Larry Parsons for issuing shares in the rights offering, but Parsons did not respond by January 12. Despite awaiting approval of the resolution, PWV registered the "pwreit" internet domain name on January 6, 2011, as it lacked a web presence. On January 12, Lesser followed up with Parsons, indicating that a majority of the Board had signed the resolution, but there was no confirmation of Parsons' response. Consequently, PWV sought consent from Norfolk Southern.
Lesser engaged in discussions with Randy S. Noe, the General Attorney at Norfolk Southern, regarding obtaining consent for PWV to issue stock. Noe was the only representative from Norfolk Southern involved in these communications. From January 25 to early February 2011, Lesser and Noe maintained near-daily contact, with PWV purportedly aiming to act in good faith. However, Lesser failed to disclose PWV's plans to restructure and pursue alternative energy assets, despite Noe's repeated requests for information.
On January 25, 2011, Lesser emailed Noe seeking consent for the stock issuance, emphasizing time pressures related to dividend schedules and compliance issues. Noe replied the next day, stating he needed to consult with financial representatives before discussing consent. The consent request attached to Lesser's email was never signed by Noe or any Norfolk Southern official.
Subsequent emails led to a conference call on January 31, 2011, where Noe requested details on how PWV planned to use the proceeds from the stock issuance. Lesser indicated the intention was to raise working capital and hinted at issuing debt if consent was not granted. On February 3, 2011, Noe reiterated the need for more information to ensure the stock issuance would not impair Norfolk Southern's interest in the leased asset. Lesser responded defensively, questioning how the equity issuance could impair the asset and expressing urgency in needing a decision.
On the same day that Lesser emailed Noe, he distributed a proposed "February Board Resolution" concerning the Rights Offering and corporate cleanup items to Trustees Wenger, Haynes, Parsons, and Mr. Jones III, as well as Mittal and Robert McCoy, the secretary and treasurer of PWV. Following this, Mr. Jones III inquired about Mittal's employment status with PWV, which was not supposed to have employees; Mittal did not provide a clear answer. Ultimately, Lesser, Haynes, and Wenger approved the Board Resolution, leading to Mr. Jones III's resignation from the Board.
On February 4, 2011, Noe communicated to Lesser that Norfolk Southern (NS) needed more information regarding PWV’s plan to raise capital to hire consultants and explore new business opportunities, highlighting concerns about the rationale for raising $1.8 million given PWV's market capitalization of $18 million. Noe emphasized that NS's consent to the transaction was tied to understanding its purpose and impact on PWV's financial viability.
On February 6, 2011, Lesser responded to Noe, asserting that NS's concerns lacked foundation and reiterated that PWV's capital raising was essential for its long-term viability amid rising public company costs. He clarified that the lease agreement required NS to be notified of the rights offering but did not grant it the power to override the PWV board's business decisions. Lesser included historical context about PWV's expansion efforts and expressed willingness to engage in further discussions with NS, seeking to secure their consent. He followed up later that day after receiving no response from Noe.
On February 7, 2011, Lesser provided Noe with the Form S-3 Registration Statement related to a rights offering and claimed it included all pertinent information about PWV’s plans. Lesser sought consent discussed since early January, warning that without it, PWV would assume NS was unreasonably withholding consent and would take necessary actions. Later that day, Noe indicated he would discuss the matter with Norfolk Southern’s finance representatives at their annual management meeting. A few days later, Noe communicated that while he had met with the finance team, further internal processes were needed.
On February 9, 2011, Lesser attempted to arrange a call with Noe for updates. Noe, traveling at the time, assured Lesser he would discuss it the next day. Lesser expressed urgency to finalize the consent and inquired if he could speak with someone else. Noe responded that involving others would not expedite the process, emphasizing the complexity of Norfolk Southern’s organizational structure.
Frustrated, Lesser reiterated the obligation under the lease for timely consent and requested clarity on the status. During this exchange, Noe consulted with senior Norfolk Southern officials regarding the Proposed S-3.
On February 14, 2011, Noe sent Lesser Norfolk Southern’s signed Consent to Issue Stock, which was signed by Friedman without having personally reviewed the Proposed S-3, although he discussed it with Noe. The Consent indicated it was contingent upon the accuracy of the Proposed S-3’s representations and clarified that it did not alter any lease terms. The Proposed S-3 indicated PWV aimed to offer existing shareholders the right to purchase up to 113,250 common shares, seeking to raise approximately $1,019,250 to enhance equity capital affordably and inclusively for shareholders.
Proceeds from the rights offering will be allocated to enhance PW's business operations, including hiring employees and consultants to develop a broader business plan, conducting due diligence on investment opportunities aligned with its REIT status, and covering general corporate expenses, particularly those related to its public company status. PW has not guaranteed success in its expansion efforts, and the "Risk Factors" section highlights potential challenges, such as limitations imposed by existing lease agreements that could hinder growth. The Proposed S-3 includes a standard disclaimer regarding forward-looking statements, indicating that PW may revise its plans. Notably, PW's strategy to address lease restrictions and invest in alternative energy projects was not disclosed in the Proposed S-3, despite being documented in previous communications from management. Lesser misrepresented the completeness of information in the Proposed S-3 to Norfolk Southern, who relied on these assurances when issuing consent for the rights offering. Norfolk Southern's decision-making would have differed if it had been aware of PW's intentions to pursue alternative energy investments.
Norfolk Southern generally discourages competition with its customers, such as oil, coal, and utility companies reliant on rail transport. Norfolk Southern would not have consented to PWV's rights offering had it known PWV would act contrary to the limitations specified in a prior letter dated February 14, 2011. On that same day, Lesser became PWV's CEO, and PWV filed its Form S-3 Registration Statement with the SEC on February 15, 2011, which underwent revisions based on SEC comments before receiving final approval. PWV successfully completed its rights offering in March 2011, raising just over one million dollars. After this offering, Norfolk Southern did not follow up with PWV about the use of proceeds or request access to its records. Noe indicated that Norfolk Southern did not monitor PWV's compliance with its representations regarding the use of funds, assuming that any changes would prompt PWV to seek further consent. Following the rights offering, PWV entered a consulting agreement with Caravan Partners, paying Mittal $7,500 monthly, and appointed him Vice President of Business Development. PWV also engaged with investment banking firms to pursue alternative energy investments and retained several law firms for tax and investment structuring advice. Although PWV explored potential modifications to the Lease with Norfolk Southern, discussions did not progress beyond preliminary stages. Notably, PWV did not hire any employees related to the Consent or Form S-3. Subsequently, PWV initiated actions towards restructuring, including contacting the American.
On April 11, 2011, guidance was received regarding the restructuring of AMEX, with the Board reviewing the reorganization in late May 2010, focusing on simplifying the Lease and adjusting the Settlement Account. In June 2011, Leech Tishman registered the name “Power REIT.” By early August 2011, PWV prepared confidential restructuring presentations, indicating Power REIT as a parent holding company with PWV merging into a subsidiary. The Board formally approved the reorganization in mid-August 2011, leading to the formation of Power REIT as a Maryland real estate investment trust on August 26, 2011, followed by the establishment of Power REIT PA, LLC as a wholly-owned subsidiary on August 29, 2011.
Both entities were created for a reverse triangular merger, where the acquiring company’s subsidiary merges into the target, which continues as a wholly-owned subsidiary. On December 1, 2011, PWV, Power REIT, and Power REIT PA, LLC executed a Merger Agreement, with the reverse triangular merger completed the following day. As a result, PWV became a wholly-owned subsidiary of Power REIT, with PWV common shareholders receiving one share of Power REIT for each share of PWV held.
On December 2, 2011, PWV and Power REIT filed a Form 8-K with the SEC announcing the merger, accompanied by a joint press release stating that Power REIT is the successor to Pittsburgh West Virginia Railroad. The release highlighted long-term contracts supporting infrastructure assets, such as a 99-year lease with Norfolk Southern Corporation. Subsequent SEC filings indicated PWV's name change to Power REIT, with Power REIT inheriting PWV's SEC reporting history and NYSE listing under the ticker symbol "PW." As of August 2012, Power REIT claimed on its website to continue a legacy established in 1967 by focusing on innovative infrastructure investment solutions. PWV does not have its own website.
PWV remains a legal entity post-restructuring, retaining its Lease with Norfolk Southern, ownership of the Rail Line and related properties, and the ability to receive rent payments and make dividends to Power REIT. The management and operational structure of Power REIT remained consistent with its pre-merger state, with similar assets, liabilities, and dividend policies as PWV prior to the merger. Power REIT's initial income source in December 2011 was lease revenue from PWV, and it funded expenses and dividends through payments received from PWV until ceasing dividend payments in 2014 due to litigation costs.
Both PWV and Power REIT maintain separate bank accounts and have independent Boards of Directors, yet share the same officers and headquarters in West Babylon, New York. Power REIT has continued to issue shares, increasing from approximately 1.68 million to 1.71 million between early 2014 and 2015. In December 2011, discussions took place regarding a shelf offering for 10 million shares, and by April 2012, Power REIT approved the filing of a preliminary Form S-3 for a shelf registration to raise up to $100 million, filing the actual registration with the SEC in May 2012 without notifying Norfolk Southern or seeking its consent.
Lesser contends that Power REIT is not bound by the Lease's restrictions and has never obtained prior consent from Norfolk Southern for share issuances. PWV, now privately held, has not issued shares or expanded its business since restructuring. Power REIT, however, has developed a broader business portfolio, owning multiple subsidiaries involved in solar farm real estate, with no ownership stake from PWV in these subsidiaries. Notably, Power REIT formed a subsidiary, PW Salisbury Solar, LLC, in December 2012 to acquire land in Salisbury, Massachusetts.
PWSS leases land to an operational solar farm for twenty-two years, having partially financed the acquisition through a bridge loan from Hudson Bay Partners, an affiliate of Lesser. In July 2013, PWSS refinanced this loan by borrowing $750,000 from a regional bank. Around the same time, Power REIT established PW Tulare Solar, LLC (PWTS) to purchase approximately 100 acres near Fresno, California, for about $1.55 million, funding the acquisition with $1.65 million in loans from Hudson Bay Partners. In April 2014, Power REIT formed Power REIT Financo, LLC, which created PW Regulas Solar, LLC (PWRS) to acquire 447 acres in Kern County for roughly $9.2 million, drawing approximately $6,891,000 from a credit facility at closing.
Power REIT received a $100,000 loan from PWV in September 2013 for working capital, which Lesser classified as an advance rather than a dividend. At trial, Lesser acknowledged that if the loan were deemed an advance, PWV would have violated Section 8(a)(5) of the Lease. The litigation involves claims for damages related to the loss of use of proceeds from the West End Branch dispute, loss of royalty payments, and alleged devaluation of the Lease.
A Tax Memorandum sent by Mittal to Noe on June 23, 2011, discussed tax implications concerning the proposed sale of the West End Branch by Wheeling, Lake Erie to the Pennsylvania Department of Transportation for $580,000. PWV contended that Norfolk Southern should reimburse it for shareholder distributions based on a “recursive payment” theory, which has since been rejected. The memorandum argued that the sale would obligate Norfolk Southern to pay PWV between $980,000 and $2,000,000 in additional rent under Section 4(b)(7) of the Lease and stated that PWV believed Norfolk Southern's tax returns were improperly prepared, failing to reflect taxable income from prior years’ additional rent payments.
PWV proposed an amendment to the Lease to alleviate Norfolk Southern's additional rent obligations and to reduce the Trust's tax burden, while expressing the need to update the Lease. Alongside this proposal, Mittal submitted an invoice totaling $4,487.50 for legal services related to the Lease and tax issues. The Tax Memorandum presented new theories from Defendants' management, and until this litigation, PWV did not contest the Settlement Account's treatment or demand payments related to third-party agreements concerning the Demised Property. The demands from the Tax Memorandum prompted Plaintiffs to file a Complaint in Declaratory Judgment against PWV and Power REIT on December 15, 2011, seeking court declarations regarding the tax payment owed, compliance with Lease provisions, and restrictions against Defendants declaring default or interfering with property use. Following the Complaint, PWV and Power REIT entered into an informal indemnity agreement, not documented in writing and lacking Board consultation. In response to the Complaint, PWV filed counterclaims demanding gross proceeds from the West End Branch sale. The Surface Transportation Board (STB) had jurisdiction over the West End Branch, which required STB's authority for Wheeling, Lake Erie to discontinue service and abandon its obligations. The STB approved the abandonment in October 2011, yet the sale to PennDOT has not closed due to ongoing litigation. Notably, for nearly four years post-abandonment, Norfolk Southern did not request PWV to finalize the transaction or secure funds, nor did it make any claims against Wheeling, Lake Erie, regarding the proceeds.
Lake Erie sought legal remedies to finalize a transaction and secure funds, including injunctive relief and escrow requests, but did not act until May 8, 2015, after the court's summary judgment ruling, when Norfolk Southern prompted PWV to execute a deed for the transaction. PWV has yet to receive this deed. This correspondence marked the first contact since PWV abandoned the deal in 2011. At trial, PennDOT did not provide testimony on its potential purchase of the West End Branch, nor regarding the sale price or reasons for the delay in closing. Norfolk Southern chose not to proceed with the closing due to PWV's claim of $1.3 million owed and concerns over default risks related to a counterclaim for the sale's proceeds. A portion of the sale price, $70,000 of $580,000, was paid to Wheeling Lake Erie at an unspecified time. The closing is expected to yield $510,000 from PennDOT to be distributed to Plaintiffs according to the Sublease terms. However, Plaintiffs failed to provide evidence on the sale price or the $70,000 payment. They are pursuing compound interest damages of $121,616.97 for a delay in receiving the $510,000, allegedly caused by the defendants.
Additionally, the defendants aimed to secure working capital through royalty payments from oil, gas, and coal leases, asserting these payments should have been directed to PWV. Counterclaims concerning mineral rights were introduced, including a conversion claim against Wheeling Lake Erie for allegedly allowing third parties to extract resources from the Demised Property without PWV's consent. This claim originated on January 10, 2013, when Chesapeake Appalachia sought ratification of a lease with Wheeling Lake Erie, which was not provided, resulting in escrow of owed royalties. No evidence was presented at trial by the Plaintiffs to support these claims.
Royalties related to a specific oil and gas lease remain uncertain regarding whether they have been paid or held in escrow. The core of the Plaintiffs' damages claim is that the formation of Power REIT, intended to bypass lease restrictions, has devalued the Lease. The Plaintiffs argue that this circumvention allows Norfolk Southern to lose control over share issuance by P&WV's successor, adversely affecting the Lease's value and the Plaintiffs' long-standing operations. They contend that Defendants' actions cause irreparable harm to their property interests in the Lease, which cannot be fully remedied by monetary damages. In addition to breach of contract, the Plaintiffs allege fraud, claiming they suffered losses in contractual and property rights due to Norfolk Southern's reliance on Defendants’ misrepresentations.
At trial, Friedman identified three harms from Power REIT's formation: (1) rental income is redirected toward alternative energy initiatives, potentially harming customers; (2) the risk of lease devaluation; and (3) the introduction of risky business ventures by Power REIT that might impact its lease performance. However, Friedman did not specify any customers affected by these initiatives, nor did he provide evidence of actual damages to Norfolk Southern from these activities. He also hesitated to confirm whether the Lease's devaluation had occurred, stating no attempts had been made to sell or transfer it. Similarly, Noe testified that while the creation of Power REIT could pose risks that might devalue the Lease, no actual risk had materialized, and Norfolk Southern had not conducted any calculations on the Lease's devaluation.
Noe testified that Norfolk Southern experienced harm, particularly in its business relationship with PWV, but could not quantify this fallout. He mentioned that the litigation costs amounted to $4 million as the only specific figure related to alleged damages. Marcellus Kirchner, Norfolk Southern’s Director of Strategic Planning, echoed this sentiment, stating that changes in the corporate structure of the Defendants devalued the Lease by allowing them to bypass its restrictions. He indicated that compensatory damages sought included litigation expenses and a loss of protections from the lease, though he could not provide a calculable monetary value for these damages. Kirchner warned that Power REIT’s potential involvement in risky business arrangements could jeopardize the lease's assets.
The trial addressed breach of contract and fraud claims under Pennsylvania law, requiring the plaintiff to prove the existence of a contract, a breach of duty, and resultant damages. It was determined that Wheeling Lake Erie could not prevail on its breach of contract claim as it was not a party to the Lease with Norfolk Southern and had no contractual rights. Consequently, the Court ruled in favor of the Defendants against Wheeling Lake Erie on Count Three. Similarly, Power REIT was found not to be a party to the Lease, despite Norfolk Southern's claims of successor liability and veil piercing, which the Court will address further.
Corporate successor liability generally holds that a firm purchasing assets does not automatically assume the seller's liabilities. However, there are four established exceptions under corporate and contract law that may lead to liability: (1) the purchaser expressly or implicitly agrees to assume the liability, (2) the transaction is fraudulent and intended to evade liability, (3) the transaction constitutes a consolidation or merger, and (4) the purchaser is a mere continuation of the seller. The last two exceptions are treated similarly, as they both involve a continuity of identity between the buyer and seller. If the original entity continues to exist, there can be no successor liability. Establishing successor liability requires that the successor company has acquired all or substantially all of the predecessor's assets. Most jurisdictions require this asset transfer for liability to be imposed under the exceptions. Notably, a Pennsylvania district court has indicated that a corporation does not need to fully dissolve for the de facto merger exception to apply.
The district court determined that the "cessation of ordinary business operations" factor can be met if a predecessor is left as an assetless shell; however, PWV still owns the Rail Line and retains obligations under its Lease, indicating it is not an assetless shell. The merger in question was a stock purchase, maintaining PWV's corporate identity, which has not ceased operations, liquidated, or dissolved. PWV continues to collect rental payments and declare dividends, showing that its business nature remains unchanged post-merger. Consequently, the court concluded that the merger did not create successor liability for Power REIT.
Regarding veil piercing, there is a strong presumption against it, as it undermines the principle of corporate separateness. Piercing the veil may occur to prevent fraud, illegality, or injustice, or when recognizing the corporate entity would contravene public policy. Pennsylvania courts follow a flexible standard allowing for veil piercing without a finding of fraud or illegality, focusing instead on avoiding injustice. Various tests, including the "alter ego" theory, have been developed to assess if veil piercing is warranted, with Norfolk Southern attempting to utilize this theory. However, courts typically find these tests to be similarly structured and rarely make distinctions among them.
A court evaluates multiple factors when considering whether to disregard the corporate form, including: failure to observe corporate formalities, non-payment of dividends, corporate insolvency, the siphoning of funds by dominant shareholders, non-functioning officers and directors, absence of corporate records, the corporation acting merely as a facade for shareholders, and gross under-capitalization. In an alter ego analysis under Pennsylvania law, it must be shown that the subordinate company acted in a mechanical response to the controller's directives. This analysis is fact-specific and dependent on the equities of the situation.
In applying these factors, the court concluded that evidence did not support piercing the corporate veil between PWV and Power REIT, thus not binding Power REIT to the Lease. PWV adhered to corporate formalities, held board meetings, paid dividends, remained solvent and well-capitalized, and kept distinct corporate records and bank accounts separate from Power REIT. Additionally, PWV continued its operations post-merger, receiving rental payments and issuing dividends. The shared directors between PWV and Power REIT did not alone justify disregarding the corporate structure. Furthermore, Power REIT was found not liable for PWV's actions that occurred before its formation, as piercing principles do not apply to entities not in existence at the time of the alleged wrongful acts.
Power REIT cannot be held liable under the Lease or for any alleged acts of its subsidiary, PWV, as plaintiffs failed to provide evidence linking Power REIT’s activities to the contract breach by PWV. Consequently, Norfolk Southern's breach of contract claim against Power REIT is legally unsupported, leading to a judgment in favor of Power REIT. Regarding PWV, Norfolk Southern asserts that PWV breached Lease covenants by making advances and failing to disclose ongoing acquisitions in alternative energy. The breach allegations occurred more than a year after Norfolk Southern's initial complaint, and they did not amend their pleadings to include claims related to these actions. While typically barred, Federal Rules of Civil Procedure allow for issues not raised in pleadings to be treated as if they were included if tried by consent. The Court concludes that the breach of contract claim concerning the advance was impliedly consented to by both parties, recognizing its introduction during the trial, particularly through testimony about the loan constituting an advance prohibited by the Lease.
The testimony reveals that a loan was made to Power REIT in September 2013, but the exact purpose of the loan and whether Power REIT had a pressing need for funds at that time remains unclear. The decision to loan was made by the boards of both Power REIT and P&WV, implying a mutual acknowledgment of necessity. The witness, Mr. Lesser, suggests that the funds could have been distributed as dividends instead of a loan, indicating a potential violation of Section 8(a)(5) of the lease, which prohibits borrowing or making advances without consent. Lesser acknowledges that the actions taken may have contravened the lease terms, and expresses willingness to correct any mistakes related to this issue. Furthermore, the court notes that the testimony constitutes an admission of liability by Lesser on behalf of PWV, particularly in light of the lack of objection from the defense regarding the introduction of evidence related to the unpleaded issue. The testimony and subsequent questioning affirm that PWV was aware of the lease's requirements and breached Section 8(a)(5) concerning the loan to Power REIT.
The court determined that the defendants did not suffer prejudice from the plaintiff's new theory, as they had opportunities to respond during re-direct examination and in their Proposed Findings of Fact and Conclusions of Law, yet chose not to address it. The court ruled that PWV breached the Lease by advancing funds to Power REIT, resulting in a judgment in favor of Norfolk Southern. Under Pennsylvania law, a claim for breach of the implied covenant of good faith and fair dealing is integrated within a breach of contract claim. Therefore, the court found that the plaintiffs' claim regarding PWV's breach of this covenant failed legally, as PWV's rights and obligations under the Lease remained unchanged.
Regarding the fraud claim, the court outlined the necessary elements for establishing common law fraud in Pennsylvania, which include: a material misrepresentation made falsely, with intent to deceive, that the victim justifiably relied upon, resulting in injury. The Supreme Court of Pennsylvania defined fraud broadly, encompassing various deceptive actions or omissions. Misrepresentations can include concealment of pertinent information rather than just false assertions, making them actionable under certain circumstances.
Fraudulent misrepresentation can occur through the concealment of information that should be disclosed, intended to deceive another party to their detriment. However, mere silence is insufficient for a fraud claim unless there is a legal obligation to disclose. In the case of Wheeling Lake Erie, the court found the fraud claim inadequate because there was no evidence presented at trial showing that the defendants made any relevant representations or omissions regarding consent for PWV to issue shares. Without these elements, Wheeling Lake Erie’s fraud claim was dismissed as a matter of law.
Conversely, Norfolk Southern established by clear and convincing evidence that PWV committed fraud during the consent process for a rights offering in early 2011. Specifically, Lesser's email to Noe, which claimed that the Proposed S-3 contained all relevant information about PWV's plans, was materially false, as it omitted crucial details about PWV's intentions to restructure and invest in alternative energy. The totality of the circumstances indicated that Lesser intended to mislead Norfolk Southern into relying on his misrepresentations, knowing that the real plans would likely prevent Norfolk Southern from granting consent. Norfolk Southern's reliance on Lesser's assurances was deemed justified because they had no reason to doubt the accuracy of the information presented in a document meant for SEC filing.
A party claiming fraud must establish that the fraud caused economic harm, as outlined in Eigen v. Textron Lycoming Reciprocating Engine Division. Norfolk Southern has demonstrated that PWV's fraud has adversely affected its interests concerning the Lease, although quantifying this harm precisely is challenging. The Lease no longer provides the protections initially intended. Norfolk Southern's fraud claim is not precluded by the gist of the action doctrine, which differentiates tort claims from breach of contract claims based on the nature of the duty allegedly breached. The Pennsylvania Supreme Court, in Bruno v. Erie Insurance Company, emphasized that the specifics of a claim are crucial, meaning that simply labeling a claim as tortious does not determine its true nature. The distinction lies in whether the duty breached arises from the contractual agreement or a broader social duty imposed by law. The court reaffirmed that the existence of a contract does not automatically categorize a claim as one for breach of contract; instead, it can be based on tortious behavior, such as negligence, occurring in the context of the contractual relationship. In this case, the Lease was merely the context in which PWV’s fraudulent actions occurred. Norfolk Southern's claim hinges on PWV's fraudulent misrepresentations rather than any failure to adhere to the Lease’s specific covenants, indicating a violation of a broader social duty to avoid fraud.
Judgment is entered in favor of Norfolk Southern against PWV for fraud, but Power REIT is also ruled in favor due to its non-existence at the time of the alleged fraud and lack of connection to PWV. The fraud claim against Power REIT fails as a matter of law. Norfolk Southern seeks various damages including compensatory, consequential, punitive, and equitable relief, but the Court determines it is entitled only to nominal damages.
Compensatory and consequential damages claimed by Norfolk Southern relate to the loss of use of sale proceeds from the West End Branch, loss of royalty payments, and alleged devaluation of a lease. Under Pennsylvania law, to recover damages, a plaintiff must show a causal connection to the defendant's actions. Although precise damages do not need to be mathematically certain, they must not be speculative.
Norfolk Southern's claims for damages related to the West End Branch sale lack a causal link to PWV’s actions, as the delays stem from unrelated conduct and Norfolk Southern's own decisions, which included failing to schedule a closing or pursue necessary actions for payment. Additionally, there is no evidence linking the withholding of royalty payments to PWV’s alleged fraud, nor any proof regarding the amounts at issue or attempts to obtain these payments. Consequently, these claims are deemed speculative and unsupported by evidence.
Norfolk Southern was unable to demonstrate any damages resulting from PWV's advance to Power REIT, and did not attempt to establish such damages. Consequently, Norfolk Southern is not entitled to compensatory or consequential damages, as there is a lack of evidence connecting any alleged loss to the breach of contract or fraud. Although a breach of contract was proven, without demonstrable damages, Norfolk Southern is entitled only to nominal damages. Under Pennsylvania law, nominal damages amount to one dollar ($1.00) when damages are not proven, and this principle has been upheld by the Third Circuit.
In terms of punitive damages, Pennsylvania law stipulates that such damages may be awarded for particularly egregious conduct that demonstrates an evil motive or reckless indifference to others' rights. To qualify for punitive damages, a plaintiff must provide evidence showing that the defendant was aware of the risk of harm and acted with conscious disregard for that risk. This mental state is essential for imposing punitive damages, reinforcing the need for clear evidence of the defendant's culpability.
An award of punitive damages must adhere to due process principles, as established by the U.S. Supreme Court in BMW of N. Am. Inc. v. Gore. The Court outlined three key guideposts for assessing punitive damages: 1) the degree of reprehensibility of the defendant’s conduct; 2) the disparity between the harm suffered by the plaintiff and the punitive damages awarded; and 3) the comparison between the punitive damages and civil penalties in similar cases. The first guidepost is particularly critical, with sub-factors including whether the harm was physical or economic, the defendant’s indifference to the safety of others, the financial vulnerability of the victim, the nature of the conduct (repeated vs. isolated), and the intent behind the harm (malice, trickery, or accident).
The second guidepost emphasizes the ratio of punitive to compensatory damages, with the Supreme Court indicating that ratios exceeding single digits are rarely constitutional. In this case, an 18:1 ratio of punitive to compensatory damages was deemed excessive.
After evaluating these factors, the Court concluded that Norfolk Southern was not entitled to punitive damages, noting that four of the five Gore factors were unfavorable to them. The harm incurred was primarily economic, with no evidence of indifference to public safety by PWV. Norfolk Southern was not financially vulnerable and did not demonstrate any actual harm to its customers resulting from PWV's actions. The fraudulent conduct was characterized as an isolated incident rather than a pattern of behavior.
Norfolk Southern failed to convincingly demonstrate that PWV, through Lesser, engaged in fraudulent conduct that permeated all related events and disputes, including the withholding of royalties. The harm to Norfolk Southern appeared to stem from Lesser's deceitful actions, which were calculated and dishonest, aimed at circumventing longstanding lease restrictions. Despite recognizing the wrongdoing motivated by greed and deception, the court found that this factor did not outweigh other relevant factors under existing legal precedent, particularly the Gore doctrine. Consequently, punitive damages were not awarded.
Additionally, Norfolk Southern's request for equitable relief—specifically to prevent Power REIT from issuing stock without consent and to retrieve shares acquired through Lesser’s affiliates—was deemed a covert attempt to secure remedies previously denied by the court, such as permanent injunctions and rescission. As such, the court denied this request for equitable relief.
Ultimately, the court ruled in favor of Norfolk Southern against Pittsburgh West Virginia Railroad on certain counts, while also ruling in favor of Power REIT against Norfolk Southern, and in favor of both Pittsburgh West Virginia Railroad and Power REIT against Wheeling Lake Erie Railway Company. Norfolk Southern was awarded $1.00 in damages from Pittsburgh West Virginia Railroad on the specified counts. A formal judgment will follow this ruling.
During the non-jury trial, Plaintiffs submitted a Trial Brief and Bench Memoranda related to Defendants’ Rule 52(c) motion. An error in the Exhibit List misidentified Joint Exhibit 3 as emails rather than the Lease. Mr. Jones III testified about PWV's consideration of business ventures beyond the Lease, indicating that although options were explored due to limited income and rising expenses, there was no intention to compromise the Lease. Lesser claimed he had only a vague idea about PWV's future direction until August 2011, contradicting the Court’s view that he had long suggested corporate restructuring. It was in August 2011 that the Board formally agreed to a reverse triangular merger. Lesser proposed a rights offering to raise capital for operational needs and emphasized the importance of respecting Lease restrictions to enhance shareholder value. The Court found Lesser's trial assertions to be an attempt to present a more favorable narrative. Lesser also acknowledged he could have informed Norfolk Southern about a potential investment related to a wind farm but chose not to. Noe, testifying about market perceptions regarding additional share issuance, admitted confusion over his previous statements but confirmed that Norfolk Southern perceived no risk to its leasehold interest from PWV's activities. Susman became a Trustee in 2011 after the Board opted not to renominate Parsons due to a conflict of interest.
Virgil Wenger does not recall being informed by PWV and Power REIT that the ongoing litigation included allegations of fraud against them. He has served on the PWV Board before and after restructuring and has been on the Power REIT Board since its inception. The Court has previously detailed the extensive procedural history of this litigation in earlier Memorandum Opinions. Wheeling Lake Erie did not present any testimony or evidence at trial regarding claimed damages. Defendants have highlighted the potential benefits of the litigation for Power REIT's stock value in investor presentations, including a February 2015 presentation that estimated a "win" for PWV could yield approximately $24.6 million for Power REIT shareholders, representing over a 150% increase in the share price. Plaintiffs allege that Chesapeake Appalachia and Southwestern Energy Company have withheld over $50,000 in royalty payments under oil and gas leases on the Demised Property, seeking $2,732 in compound interest for the loss of use of those payments. Pennsylvania law recognizes certain exceptions related to successor liability, including a 'product-line' exception for defective products and a potential transfer for inadequate consideration, which may be viewed as constructive fraud. Plaintiffs assert their consequential damages stem from the loss of use of funds, which they define as their compensatory damages.
