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BNSF Railway Co. v. Panhandle Northern Railroad, L.L.C.

United States Court of Appeals, Fifth Circuit

January 3, 2020

BNSF RAILWAY COMPANY, Plaintiff - Appellee
v.
PANHANDLE NORTHERN RAILROAD, L.L.C., Defendant-Appellant

          Appeal from the United States District Court for the Northern District of Texas

          Before DAVIS, GRAVES, and HIGGINSON, Circuit Judges.

          W. EUGENE DAVIS, CIRCUIT JUDGE.

         In this contract dispute between two railroad companies, Defendant, Panhandle Northern Railroad, L.L.C. ("PNR"), appeals the district court's judgment in favor of Plaintiff, BNSF Railway Company ("BNSF"). PNR asserts that, contrary to the district court's determination, the handling-carrier relationship established by the 1993 Agreement between the parties was terminable at will under Illinois law. PNR argues that the district court consequently erred in ruling that PNR breached the Agreement when it terminated unilaterally the handling-carrier relationship effective January 1, 2017, after reasonable notice to BNSF. PNR further argues that the district court erred in dismissing its affirmative defense of BNSF's prior material breach, in requiring PNR to identify an express contractual provision in order to assert the defense of justification, and in awarding BNSF exemplary damages and specific performance.

         We conclude that the first issue raised by PNR is determinative of this appeal. Specifically, we hold that the handling-carrier relationship established by the 1993 Agreement between the parties is terminable at will under Illinois law and that PNR consequently had a right to terminate the relationship unilaterally upon reasonable notice to BNSF. Therefore, we REVERSE the district court's judgment and RENDER judgment in favor of PNR.

         I. Factual Background

         In October 1993, the predecessor companies[1] of BNSF and PNR executed a contract entitled: Agreement for Sale of Certain Assets, Rights and Obligations of the Atchison, Topeka and Santa Fe Railway Company to Panhandle Northern Railroad Company ("1993 Agreement"). The 1993 Agreement concerned one of BNSF's rail branch lines-the Borger Line. As illustrated below, the Borger Line stretches approximately 31 miles from Borger, Texas to Panhandle, Texas. At Panhandle, the Borger Line connects to BNSF's Southern Transcon line, a main line running from Chicago to Los Angeles.

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         As explained by BNSF, it built the Borger Line to serve petrochemical refineries constructed in Borger in the 1920s. In the early 1990s, however, seeking "to conserve capital, protect customer relationships, and increase efficiency," BNSF sold certain branch lines and abandoned others. Although it apparently did not make economic sense to BNSF to operate the Borger Line, BNSF did not believe it could obtain the necessary federal regulatory approval to abandon the line. Therefore, BNSF sold the Borger Line and, consistent with BNSF policy when selling branch lines, contracted with the purchasing railroad, PNR, to serve as BNSF's "handling carrier." As explained in further detail below, a handling-carrier arrangement allowed BNSF to set the routes and rates for freight customers requiring service on BNSF's rail line and PNR's rail line (the newly-acquired Borger Line), and to bill and collect revenue from those interline rail service customers, as though the Borger Line were still part of the BNSF rail system after the sale. PNR, as the new owner and operator of the Borger Line, moved ("handled") the freight on the Borger Line and was paid a flat fee per rail car by BNSF out of the revenue BNSF received from freight customers for the interline rail service provided by both companies.[2]

         In the 1993 Agreement, BNSF agreed to sell the Borger Line and associated rail business to PNR by November 1993. Specifically, in the first section of the Agreement, BNSF agreed to sell to PNR: (1) the Borger Line and all of the real estate and improvements associated with the line, (2) the rail freight transportation business it conducts on the line (or "Rail Business"), and (3) all of the tangible personal property it used in connection with its Rail Business and located on the line. The Agreement provided that the Rail Business included BNSF's rights "to operate freight trains over the Borger Line, to establish freight rates over the Borger Line, to enter into freight transportation contracts for rail freight operations over the Borger Line, and to interchange rail freight traffic to and from the Borger Line with [BNSF]." BNSF also agreed to assign to PNR all of its rights and obligations under various contracts "relating to the Borger Line and the Rail Business to the extent necessary for PNR to conduct the Rail Business as presently conducted." To complete these transactions, the Agreement required BNSF to deliver a quitclaim deed and bill of sale to PNR, as well as execute an assignment in favor of PNR, upon "Closing." The Agreement set a purchase price of $995, 000 "[f]or the rights and interests conveyed and assigned by [BNSF] to PNR," which was to be paid at Closing.

         On November 3, 1993, BNSF sold the Borger Line to PNR by executing a quitclaim deed to PNR, conveying all of BNSF's "right, title and interest . . . in and to the lands and premises" described as the Borger Line. On November 15, 1993, BNSF also executed an assignment in favor of PNR, in which BNSF assigned its rights in various contracts to PNR "related to the Borger Line and the Rail Business to the extent necessary for PNR to conduct the Rail Business as presently conducted."

         The second section of the 1993 Agreement detailed the transition of the Borger Line from being operated by BNSF to being operated by PNR following the Closing. The Agreement provided that at 12:01 A.M. on the day following the Closing Date, "[a]ll rail operations on the Borger Line and the Rail Business shall be transferred from [BNSF] to PNR." This section also confirmed that, as owner and operator of the Borger Line, "PNR shall be responsible for all common carrier rail operations on the Borger Line."[3]

         The third section of the Agreement, entitled "Operations Following the Closing Date," lies at the heart of the dispute between the parties. This section of the Agreement created the handling-carrier relationship between PNR and BNSF that would take effect after completion of the sale of the Borger Line to PNR. As stated above, this arrangement allowed BNSF to set routes and rates, and bill and collect revenue from customers, as though the Borger Line were still part of the BNSF rail system. BNSF moved freight on its line, and PNR moved freight on the Borger Line, but for those customers requiring interline service (i.e., service over both BNSF and PNR rail lines), BNSF billed the customers for the services rendered by both railroads. Specifically, the 1993 Agreement provided that "[u]ntil such time as PNR and [BNSF] otherwise mutually agree," BNSF "shall have the authority to establish through rail routes ('Through Routes'), and to offer through rail freight rates via the Through Routes ('Through Rates'), for interline rail freight transportation service offered by PNR and [BNSF]." The parties further agreed that the revenue BNSF received from customers paying for such interline rail service would be divided between them and that BNSF would remit a negotiated flat fee per rail car to PNR out of that revenue for its rail service.

         From the perspective of a BNSF interline customer requiring service on the Borger Line, BNSF's service with respect to the setting of rates and the billing for services rendered was the same prior to and after the sale of the Borger Line to PNR. The customer continued to receive just one bill from BNSF, rather than two from BNSF for rail service on its rail line and PNR for rail service on its newly-acquired Borger Line.[4] BNSF presumably benefitted from this arrangement as it continued to bill customers and collect revenue as though it still owned the Borger Line. PNR, which was a startup operation, also presumably benefitted in that it did not have to establish customer relationships or take on the administrative tasks of billing and collecting the revenue for the rail service it rendered on the Borger Line.

         The last section of the 1993 Agreement stated that "[t]he representations, warranties, and obligations of PNR and [BNSF] in this Agreement are continuing and survive Closing." Additionally, the Agreement provided that the "[t]erms of continuing obligations in this Agreement are subject to amendment only by a written contract signed by both PNR and [BNSF], or their respective successors or assignees." The Agreement further stated that it "shall be governed by and construed in accordance with the laws of the State of Illinois."

         Between 1994 and 2016, the parties amended the 1993 Agreement eight times, primarily to reflect increases in the per-car fee BNSF was required to remit to PNR, but the basic handling-carrier relationship described above remained in place for approximately twenty-three years. In September 2016, PNR advised BNSF of its intention to terminate the handling-carrier relationship effective January 1, 2017, and to begin setting rates on its Borger Line and billing and collecting directly from customers for the freight transportation services it renders on the line. PNR asserted that it could terminate the handling-carrier relationship because under Illinois law, which specifically applied to the Agreement, "perpetual agreements are terminable by either party on reasonable notice." BNSF, however, disagreed that the handling-carrier arrangement between the parties could be terminated unilaterally and filed suit against PNR.

         II. Procedural History

         In October 2016, BNSF filed a petition for declaratory relief and damages, an application for a temporary restraining order ("TRO"), and a request for injunctive relief against PNR in Texas state court. BNSF asserted that PNR had no right, contractual or otherwise, to terminate the handling-carrier relationship created by the 1993 Agreement. BNSF further maintained that it was entitled to damages based on PNR's anticipatory breach of the Agreement and PNR's breach of its duty of good faith and fair dealing. BNSF additionally contended that PNR threatened to interfere with BNSF's relationships with its customers by separately setting rates and billing BNSF's customers for freight transportation services.

         PNR removed the action to federal district court on the basis of diversity jurisdiction. BNSF thereafter filed an amended complaint in which it added an alternative claim for rescission of the Agreement. Specifically, if the district court determined that the handling-carrier relationship between the parties was terminable at will, then BNSF requested the district court to use "its equitable powers to rescind and/or unwind" the sale of the Borger Line "subject to the approval of the Surface Transportation Board." BNSF also filed an application for a TRO and preliminary injunction under Rule 65 of the Federal Rules of Civil Procedure. The district court denied BNSF's application, concluding that BNSF had not carried its burden of establishing a substantial threat of irreparable injury.

         In response to BNSF's amended complaint, PNR filed a motion to dismiss under Rule 12(b)(6). PNR contended that BNSF's claims failed because the handling-carrier relationship was of indefinite duration and, therefore, terminable at will under Illinois law. The district court denied the motion. PNR subsequently answered BNSF's amended complaint, raising numerous affirmative defenses. In the event the court determined that the Agreement should be rescinded, PNR also asserted a counterclaim against BNSF for quantum meruit for the reasonable value of the services PNR rendered BNSF and for PNR's maintenance and improvement of the Borger Line, less any amounts BNSF previously paid for the services.

         BNSF filed a motion for partial summary judgment, arguing, inter alia, that the "terminable at will" doctrine was inapplicable to PNR's obligation to act as BNSF's handling carrier. PNR also filed a motion for summary judgment, reasserting the arguments raised in its Rule 12(b)(6) motion. The district court granted BNSF's motion for partial summary judgment and denied PNR's summary judgment motion. Pertinent to the issues on appeal, the district court determined that, as a matter of law, the Agreement was not terminable at will. Consequently, the district court concluded that PNR breached the Agreement when it unilaterally terminated the Agreement.

         The district court subsequently tried, before a jury, the issue of the amount of damages BNSF was entitled to as a result of PNR's contractual breach and BNSF's claim against PNR for tortious interference with its customer contracts. Based on the jury's verdict, the district court ultimately entered a final judgment awarding BNSF $900, 000 for past contract injury and $795, 991 for past tortious interference, both amounts "to be construed as an equitable recovery." The district court also awarded BNSF $1, 591, 982 in exemplary damages and ordered PNR's specific performance "of its obligations under Section III of the Agreement to act as BNSF's handling carrier." PNR filed a timely notice of appeal. It also filed a motion to stay execution of the judgment, which the district court granted. The district court also ordered PNR to post a supersedeas bond in the amount of $5, 815, 083.38 for the duration of the pendency of PNR's appeal.

         III. Discussion

         As stated above, the district court granted partial summary judgment in favor of BNSF and determined, as a matter of law, that the handling-carrier relationship between the parties was not terminable at will and that PNR was not entitled to terminate it unilaterally. This court reviews a district court's grant of summary judgment de novo.[5] Under Rule 56 of the Federal Rules of Civil Procedure, "the court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law."[6]

         Because this case arises under our diversity jurisdiction, the Erie doctrine requires that we apply the applicable state substantive law.[7] It is undisputed that Illinois law governs interpretation of the 1993 Agreement.[8] In determining Illinois law, "we look first to the final decisions of . . . the [Illinois] Supreme Court."[9] "In the absence of a determinative decision by that court on the issue of law before us, we must determine, in our best judgement, how we believe that court would resolve the issue."[10] An Erie guess must be an "attempt to predict state law, not to create or modify it."[11]

         A. The Illinois Supreme Court's Jespersen Decision

         As acknowledged by the parties and the district court, Jespersen v. Minnesota Mining and Manufacturing Company[12] is the authoritative decision from the Illinois Supreme Court regarding the rules applicable to contracts of indefinite duration under Illinois law. In Jespersen, the court acknowledged that "[i]t has long been recognized that contracts of indefinite duration are generally terminable at the will of the parties."[13] A close look at the court's analysis of the contract involved in Jespersen shows that this general rule of at-will termination is strong and that the Illinois Supreme Court requires specific and unequivocal language to find the rule inapplicable to a contract of indefinite duration.

         In Jespersen, a distributor sued a manufacturer for breach of contract after the manufacturer terminated a sales distribution agreement with the distributor after thirteen years.[14] The contract provided "that it 'shall continue in force indefinitely' unless terminated in the manner provided in article IV."[15]Under article IV, there were two termination provisions: one applicable to the manufacturer and the other applicable to the distributor. The provision applicable to the manufacturer stated that the manufacturer "may, upon not less than thirty (30) days notice to the Distributor, terminate this agreement for any of the following reasons." All of the listed reasons constituted "instances of material breach."[16] The ...


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