UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): September 16, 1996
NORTH CAROLINA RAILROAD COMPANY
(Exact name of registrant as specified in its charter)
North Carolina
(State or other jurisdiction of incorporation)
0-15768 56-6003280
(Commission File Number) (IRS Employer Identification No.)
3200 Atlantic Avenue
Suite 110
Raleigh, North Carolina 27604
(Address of principal executive offices) (Zip Code)
(919) 954-7601
(Registrant's telephone number, including area code)
This document contains 58 pages.
<PAGE> 1
Table of Contents
Item 5. Other Events . . . . . . . . . . . . . . . . . 3
Item 7. Financial Statements and Exhibits . . . . . . . 4
Signatures . . . . . . . . . . . . . . . . . . . . . . . 4
<PAGE> 2
Item 5. Other Events
Real Estate Investment Trust Election
On September 16, 1996, the Registrant elected tax status as a
Real Estate Investment Trust for the tax year ended December 31,
1995. Pursuant to that election, the Registrant declared a special
cash dividend in the amount of $3.06 per share, payable on or about
October 15, 1996, to holders of record of common stock at the close
of business on September 27, 1996. The Registrant will address the
issues regarding REIT qualification in future years at a later
date, and the special dividend is not indicative of future
dividends.
Legal Proceedings
On September 20, 1996, the Registrant filed an action against
Norfolk Southern Corporation, including certain subsidiaries or
affiliates (hereafter referred to collectively as "Norfolk
Southern") in the Superior Court of Wake County of the State of
North Carolina. The action seeks a declaratory judgment of the
Registrant's property ownership and other rights and obligations of
the parties arising out of the expiration of the Registrant's
leases with Norfolk Southern, and seeks other claims and remedies.
On September 23, 1996 the Registrant filed (i) a petition for
interim relief and (ii) a petition to set trackage compensation
before the United States Transportation Board ("STB") for the use
of the Registrant's property by Norfolk Southern, STB Finance
Docket No. 33134. The petition for interim relief seeks an order
requiring Norfolk Southern to pay rental on a temporary basis in
the amount of $680,700 monthly pending a final adjudication or
other resolution of the Registrant's state court claims and the
Registrant's petition to the STB to set trackage compensation.
Information about negotiations with Norfolk Southern has been
disclosed by the Registrant in prior reports to the Securities and
Exchange Commission.
The foregoing is only a summary of the claims made by the
Registrant and the reader should refer to the complaint and
petitions filed by the Registrant, which are hereby incorporated
herein in their entirety. The Registrant believes that litigation
against Norfolk Southern will be both protracted and difficult.
Legal fees and expenses associated with the litigation could exceed
several million dollars. In addition, Norfolk Southern may respond
to the Registrant's legal action by seeking permission from the STB
to abandon all or part of the Registrant's line or Norfolk Southern
may seek to divert railroad traffic from the Registrant's railroad
line. There can be no assurance as to the amount or timing of
<PAGE> 3
rental payments if compensation is set by the STB, or that the
outcome of the litigation before the courts or the STB will be
favorable to the Registrant.
Item 7. Financial Statements and Exhibits
c. Exhibits
Index to Exhibits
Exhibit Item
99.1 Complaint, Civil Action No. 96-CVS-09519,
filed on September 20, 1996 in the
Superior Court of Wake County, North
Carolina.
99.2 Petition to Set Trackage Compensation and
Petition for Interim Relief, filed on
September 23, 1996 before the United
States Surface Transportation Board,
Finance Docket No. 33134.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned hereunto duly authorized.
NORTH CAROLINA RAILROAD COMPANY
Date: October 2, 1996 By:/s/ John M. Alexander, Jr.
John M. Alexander, Jr.
Secretary and Director
<PAGE> 4
Exhibit 99.1
STATE OF NORTH CAROLINA
IN THE GENERAL COURT OF JUSTICE
COUNTY OF WAKE SUPERIOR COURT DIVISION
NO. 96-CVS-09519
NORTH CAROLINA RAILROAD
COMPANY,
Plaintiff,
v.
NORFOLK SOUTHERN CORPORATION
[VA], NORFOLK SOUTHERN RAILWAY
COMPANY [VA], ATLANTIC AND
EAST CAROLINA RAILWAY COMPANY
[NC], NS FIBER OPTICS, INC.
[VA], AIRFORCE PIPELINE, INC.
[NC], CHARLOTTE-SOUTHERN
CORPORATION [NC], NS-CHARLOTTE
TOWER CORP. [NC], CHARLOTTE-
SOUTHERN HOTEL CORPORATION
[NC], CITICO REALTY COMPANY,
INC. [VA], THE ATLANTA AND
CHARLOTTE AIR LINE RAILWAY COMPLAINT FOR DECLARATORY AND
COMPANY [NC], SOUTHERN REGION OTHER RELIEF
INDUSTRIAL REALTY, INC. [GA],
SOUTHERN RAIL TERMINALS OF
NORTH CAROLINA, INC. [NC],
NORFOLK SOUTHERN PROPERTIES,
INC. [VA], CAMP LEJEUNE
RAILROAD COMPANY [NC], STATE
UNIVERSITY RAILROAD COMPANY
[NC], HIGH POINT, RANDLEMAN,
ASHEBORO, AND SOUTHERN
RAILROAD COMPANY [NC], THE
NORTH CAROLINA MIDLAND
RAILROAD COMPANY [NC], YADKIN
RAILROAD COMPANY [NC],
SOUTHERN RAILWAY-CAROLINA
DIVISION [SC], NORFOLK AND
WESTERN RAILWAY COMPANY [VA],
Defendants
Plaintiff North Carolina Railroad Company ("North Carolina
Railroad"), seeking declaratory and other relief, alleges:
PARTIES
1. Plaintiff is a corporation organized and existing under
the laws of the State of North Carolina by charter dated January
27, 1849, with its principal office and place of business in
Raleigh, Wake County, North Carolina.
2. Upon information and belief, defendant Norfolk Southern
Corporation, is a corporation organized and existing under the laws
of the State of Virginia and is authorized to do business in North
Carolina. Norfolk Southern is the successor in interest by merger
to the Southern Railway Company.
3. Upon information and belief, defendants Atlantic and East
Carolina Railway Company, Airforce Pipeline, Inc., Charlotte-
Southern Hotel Corporation, Charlotte-Southern Corporation, NS-
Charlotte Tower Corp., The Atlanta and Charlotte Air Line Railway
Company, Southern Rail Terminals of North Carolina, Inc., Camp
Lejeune Railroad Company, State University Railroad Company, High
Point, Randleman, Asheboro, and Southern Railroad Company, The
North Carolina Midland Railroad Company, and Yadkin Railroad
Company are corporations owned or controlled by Norfolk Southern,
and are organized and existing under the laws of the State of North
Carolina.
4. Upon information and belief, defendants Norfolk Southern
Railway Company, NS Fiber Optics, Inc., Citico Realty Company,
Inc., Norfolk Southern Properties, Inc., and Norfolk and Western
Railway Company are corporations owned or controlled by Norfolk
Southern, are organized and existing under the laws of the State of
Virginia, and are authorized to do business in North Carolina.
5. Upon information and belief, defendant Southern Region
Industrial Realty, Inc., formerly known as Georgia Industrial
Realty, Inc., is a corporation owned or controlled by Norfolk
Southern, is organized and existing under the laws of the State of
Georgia, and is authorized to do business in North Carolina.
6. Upon information and belief, defendant Southern Railway-
Carolina Division is a corporation owned or controlled by Norfolk
Southern, is organized and existing under the laws of the State of
South Carolina, and is authorized to do business in North Carolina.
7. All defendants may claim an interest in property, assets,
rights or privileges at issue in this action. Reference to
"Norfolk Southern" throughout this complaint includes reference to
Norfolk Southern Corporation as well as to each and every other
defendant as its interest may appear or be proven to exist.
FACTUAL ALLEGATIONS
8. In 1871, North Carolina Railroad leased its railroad to
the Richmond & Danville Railroad Company, a Virginia corporation,
for a term of thirty years ("the 1871 lease"). The Richmond &
Danville Railroad went into receivership in 1892.
9. In or about February, 1894, the Southern Railway Company
("Southern") was incorporated by an act of the Virginia legislature
for the express purpose of purchasing the assets of the Richmond &
Danville Railroad. On or about June 18, 1894, the Richmond &
Danville Railroad Company and all of its property, including the
1871 lease, was sold in foreclosure to Southern. Accordingly, as
of 1894, Southern assumed the 1871 lease.
10. On or about August 16, 1895, North Carolina Railroad
entered into a "deed" with Southern, whereby North Carolina
Railroad demised to Southern
the entire railroad of [North Carolina Railroad] with all
its franchises, rights of transportation, works and
property, including, among other things, its super
structure, roadbed and right-of-way incident thereto,
situate in the State of North Carolina, and leading from
the City of Goldsboro, in the County of Wayne, to the
City of Charlotte, in the County of Mecklenburg, in said
state, and, also, the depot houses, shops, buildings,
fixtures, engines, cars, and all franchises, rights and
privileges, and other things, if any, of whatsoever kind
or nature, to the said North Carolina Railroad Company
belonging, and necessary, incident and appurtenant to the
free, easy and convenient operation of the railroad
leased hereby. . . .
(emphasis added). The term of the agreement was for 99 years
expiring on January 1, 1995. This agreement will be referred to as
"the 1895 lease" or "the 99-year lease." The 1895 lease, by its
terms, terminated the 1871 lease. A copy of the 1895 lease is
attached hereto as Exhibit A
11. The rent for this entire railroad was fixed for the
entire period of the 1895 lease from January 1, 1902 forward at
$286,000.00 a year. Even at the time, this rental rate was
characterized by many to be so inadequate that the 1895 lease was
labeled "the crime of the century" and was the subject of several
unsuccessful efforts to have it set aside.
12. The defense and justification for the low fixed rental in
the 1895 lease was stated at the time by both Southern Railway
Company and North Carolina Railroad to be that the consideration
for the lease included not only the rent payments but, more
importantly, that all "improvements," including "replacement
property," made to the railroad over its term of 99 years would
become the property of North Carolina Railroad at the expiration of
the term of the 1895 lease.
13. Accordingly, by decree dated April 13, 1898 in litigation
regarding the 1895 lease, captioned Southern Railway Company v.
North Carolina Railroad Company et al., the Circuit Court of the
United States for the Western District of North Carolina made a
finding of fact "that the betterments and improvements placed, and
to be placed upon said properties by the lessee should, at the
expiration of the term, belong to and increase the property of the
lessor," and the court, inter alia, entered a permanent restraining
order against North Carolina Railroad and its officers, directors,
and stockholders that "perpetually enjoined and restrained [North
Carolina Railroad] from breaking or from threatening to break any
of the covenants contained" in the 1895 lease.
14. The lengthy 99-year term of the 1895 lease was bargained
for and insisted upon by Southern as an additional consideration
for Southern's agreement that improvements made on the railroad
would become the property of North Carolina Railroad at the
termination of the 1895 lease. By contrast, the 1871 lease
contained a provision expressly permitting the lessee's removal of
property and improvements at the end of the term of the lease.
15. With respect to Southern's covenant to repair and
maintain the railroad, the 1895 lease states
And for the consideration aforesaid, [Southern Railway
Company] doth covenant with and oblige itself unto [North
Carolina Railroad] to keep the said railroad, roadbed,
superstructure, depots, buildings, houses, shops,
engines, cars, fixtures, and other property of every kind
and every part thereof, so hired, let, 'farmed out' and
delivered in equally as good condition and repair as the
property is at the date of this lease, or to keep, in the
place of the same, like things of equally good condition
and repair. . . .
(emphasis added).
16. The 1895 lease further states in the operative language
containing Southern's covenant to return the property, including
all improvements and replacements, to North Carolina Railroad at
the termination of the 1895 lease as follows:
And for the consideration aforesaid, [Southern Railway
Company] doth covenant with and oblige itself unto [North
Carolina Railroad Company] . . . to return, at the end of
the said term of ninety-nine (99) years, or at the
termination of said lease, to [North Carolina Railroad
Company] the said railroad, roadbed, superstructure,
depots, houses, buildings, shops, engines, cars,
fixtures, and other property, and all and every part
thereof, in like good condition and repair; or other
property, when any part of said property shall be worn
out, destroyed or abandoned, as good in quality and
substance and in like good order and repair.
(emphasis added). This portion of the 1895 lease unambiguously
sets forth the obligation of Southern to return to North Carolina
Railroad at the end of the lease not only the property received by
Southern but any other property substituted for the property leased
when the property leased is worn out, destroyed or abandoned.
17. In addition to the obligation to return the property
leased together with any replacement property in "as good condition
and repair" as the property was received at the beginning of the
lease, the 1895 lease further states unambiguously that Southern is
to surrender to North Carolina Railroad at the termination of the
lease any improvements to the property leased. In particular, the
1895 lease states:
But there shall be no claim or liability during the
continuance of this lease, or at its termination, by
[Southern Railway], its successors or assigns, upon
[North Carolina Railroad], its successors or assigns, for
any improvement of said property conveyed by this lease,
over the condition of the said property at the date of
this lease, but all such improvements shall be and remain
the property of [North Carolina Railroad], its successors
or assigns. . . .
(emphasis added).
18. On or about August 30, 1939, the Atlantic and North
Carolina Railroad Company ("ANC") entered into a "lease and
indenture" whereby the entire railroad of ANC was leased to
Atlantic and East Carolina Railway Company ("A&ECRW"), which lease
and indenture was amended or modified by agreements dated July 1,
1943, January 1, 1951, and August 19, 1954. Said lease as amended
(hereinafter "1939 lease") had a term expiring on December 31,
1994, and is attached as Exhibit B. During the term of the 1939
lease North Carolina Railroad succeeded by merger to the interests
of ANC and Norfolk Southern acquired the A&ECRW.
19. The 1895 lease and the 1939 lease (hereinafter sometimes
referred to as "the leases") expired on January 1, 1995 and December
31, 1994, respectively. Prior to their expiration, beginning on or
about June 26, 1992, North Carolina Railroad and Norfolk Southern
commenced negotiations to extend or renew both leases. After
lengthy and hard-fought negotiations, North Carolina Railroad
announced on November 22, 1994 tentative agreement with Norfolk
Southern regarding annual lease payments and certain other terms of
a proposed lease extension. Based on this tentative agreement,
North Carolina Railroad and Norfolk Southern entered into a
temporary nonholdover agreement on December 30, 1994 to cover
continued railroad operations over North Carolina Railroad's
property following December 31, 1994.
20. On August 10, 1995, after further negotiations over the
remaining terms of a lease extension agreement, the Board of
Directors of North Carolina Railroad approved a lease extension
agreement which was submitted to its shareholders on December 15,
1995. A copy of this proposed lease extension agreement is
attached hereto as Exhibit C.
21. At the December 15, 1995 shareholders meeting, it was
announced that approval of the lease extension agreement had been
obtained. Based upon this apparent approval, Norfolk Southern
began payment of monthly rental at the rate of $8,000,000.00 a
year, and made a payment of rental at that rate retroactively to
January 1, 1995. Norfolk Southern also paid an additional
$5,000,000.00 pursuant to paragraph THIRD of the proposed lease
extension agreement.
22. On December 19, 1995, a shareholder of North Carolina
Railroad filed a shareholders' derivative action in the United
States District Court for the Eastern District of North Carolina,
Civil Action Number 5:95-CV-1054-BO2, challenging, among other
things, whether a quorum existed at the December 15, 1995
shareholders' meeting, and thereby challenging the effectiveness of
the apparent shareholder approval of the proposed lease extension
agreement.
23. On July 29, 1995, an order was entered in said action
enjoining implementation of the lease extension agreement on the
grounds that a quorum had not been present at the December 15, 1995
shareholders' meeting. Following this decision, Norfolk Southern
announced that it would make no further payments of rent to North
Carolina Railroad, even though it has continued to make use of
North Carolina Railroad's property for the operation of a railroad.
Prior to the filing of this action, North Carolina Railroad sent
notice to Norfolk Southern terminating the December 30, 1994
temporary nonholdover agreement.
24. As a result of these occurrences, there is no further
agreement in force between North Carolina Railroad and Norfolk
Southern. At present, no further negotiations are being conducted
by the parties to the leases. Therefore, according to the terms of
the leases, North Carolina Railroad is entitled to take all right,
title and interest to the following properties, among others:
(1) The original right-of-way titled in North Carolina
Railroad with the roadbed and super structure together
with all improvements and fixtures thereon.
(2) Other originally demised real property titled in North
Carolina Railroad together with all improvements and
fixtures thereon.
(3) Replacement rolling stock and railroad equipment
determined with reference to an initial inventory taken
in accordance with the terms of the lease. A copy of the
initial inventory is attached hereto as Exhibit D.
(4) After acquired right-of-way to the extent such right-of-
way was a replacement for existing right-of-way or was
part of a betterment or improvement, for instance, to
accommodate the improvement of additional tracks.
(5) Other after acquired property or additions which were
replacements or improvements or betterments of the
originally demised properties, including certain depots,
shops, maintenance and repair facilities, yards and
related facilities.
(6) Such other after acquired property as is deemed to be a
replacement, improvement or betterment or addition of the
originally demised property.
25. Despite the clear language of the leases, Norfolk
Southern has taken the position that it is not obligated to return
to North Carolina Railroad anything other than the land that North
Carolina Railroad owned on January 1, 1896 and any improvements or
fixtures on that land that were used for railroad purposes on
January 1, 1896. Norfolk Southern's position appears to be that
the following, among others, are not part of the property which
must now be returned to North Carolina Railroad: (1) any land
Norfolk Southern acquired or improved in its own name or the name
of any affiliated company (even if it is a replacement for land
included in the leases); (2) any improvements even if they are on
the original North Carolina Railroad right-of-way, but which are
not deemed necessary, in Norfolk Southern's opinion, for the
operation of North Carolina Railroad as defined by Norfolk
Southern; or (3) the rolling stock which has replaced the 1895
vintage engines and cars.
26. During 1982, Norfolk Southern Corporation caused or
completed a merger or acquisition creating a combination of Norfolk
and Western Railway Company and Southern Railway Company at which
time the President of Southern Railway Company represented to the
State of North Carolina and the public that such combination would
"provide increased transportation competition in North Carolina."
North Carolina Railroad received no notice from Norfolk Southern of
such merger or any possible negative effects or abandonments of
such merger involving North Carolina Railroad, which at that time
was under the exclusive control of Norfolk Southern pursuant to the
leases.
27. Norfolk Southern has threatened North Carolina Railroad
that it will use routes created by the merger to limit or devalue
North Carolina Railroad.
28. Although the leases have now expired, Norfolk Southern is
still in possession of the operation and management of the railroad
of North Carolina Railroad and its property, assets, rights,
franchises and privileges by virtue of the Interstate Commerce Act,
as revised by the ICC Termination Act of 1995, and common carrier
duties of Norfolk Southern as the sole lessee and operator of North
Carolina Railroad.
FIRST CLAIM FOR RELIEF
(Declaratory Judgment)
29. The allegations contained in the preceding paragraphs of
this complaint are incorporated herein by reference.
30. Because North Carolina Railroad and defendants dispute
what property is to be returned by defendants to North Carolina
Railroad at the termination of the leases, an actual controversy
exists as to the rights and interests the parties have in such
property.
31. North Carolina Railroad seeks relief in resolving this
controversy pursuant to the Declaratory Judgment Act, N.C. Gen.
Stat. Section 1-253.
32. North Carolina Railroad seeks a declaration as to the
rights and property that are owned by it or in which it has an
interest effective January 1, 1995.
33. North Carolina Railroad is entitled to, and seeks, an
order declaring that it is the owner of such rights and property
and that defendants have no enforceable rights or interests in said
property.
SECOND CLAIM FOR RELIEF
(Declaratory Judgment)
34. The allegations contained in the preceding paragraphs of
this complaint are incorporated herein by reference.
35. North Carolina Railroad is informed and believes that
Norfolk Southern Corporation (and its predecessors, successors,
subsidiaries or affiliates, including the remaining defendants)
have taken title to property that is to be returned to North
Carolina Railroad at the termination of the leases.
36. Because North Carolina Railroad and Norfolk Southern
dispute what property is to be returned by Norfolk Southern to
North Carolina Railroad at the termination of the leases, an actual
controversy exists as to whether such property is properly titled
in the name of Norfolk Southern.
37. North Carolina Railroad seeks relief in resolving this
controversy pursuant to the Declaratory Judgment Act, N.C. Gen.
Stat. Section 1-253.
38. North Carolina Railroad seeks a declaration that property
that properly belongs to North Carolina Railroad pursuant to the
leases but that has been titled in the name of Norfolk Southern
Corporation (or any of Norfolk Southern's predecessors, successors,
subsidiaries or affiliates, including the remaining defendants)
should be titled in the name of North Carolina Railroad.
39. North Carolina Railroad is entitled to, and seeks, an
order declaring that it is the owner of such property, that Norfolk
Southern has no enforceable rights or interests in said property,
and that Norfolk Southern must transfer title to said property to
North Carolina Railroad.
THIRD CLAIM FOR RELIEF
(Breach of Contract)
40. The allegations contained in the preceding paragraphs of
this complaint are incorporated herein by reference.
41. Norfolk Southern has breached the 1895 lease by failing
to inventory and return: (1) the property received by Southern at
the inception of the lease; (2) other property substituted for the
property leased; (3) improvement property (as described in the
lease); and (4) replacement property (as described in the lease) to
North Carolina Railroad at the end of the 99-year lease term.
42. North Carolina Railroad is entitled to specific
performance of the 1895 lease and to recover all property to which
North Carolina Railroad is entitled pursuant to the terms of the
lease, or, in the alternative, to recover damages incurred as a
result of breach of the leases, which damages are in excess of
$10,000.
FOURTH CLAIM FOR RELIEF
(Breach of Fiduciary Duty)
43. The allegations contained in the preceding paragraphs of
this complaint are incorporated herein by reference.
44. Virtually all of North Carolina Railroad's assets are
composed of the railroad and its rights, privileges, and franchises
that were leased to Norfolk Southern pursuant to the leases.
45. The leases placed these assets of North Carolina Railroad
into the sole possession, custody and control of Southern and
Norfolk Southern for a period of 99 years.
46. By virtue of the leases, Norfolk Southern was responsible
for the management, maintenance, and upkeep of the railroad and
agreed to improve the assets of North Carolina Railroad for a
period of 99 years.
47. The relationship between North Carolina Railroad and
Norfolk Southern pursuant to the leases evidenced a special
confidence and trust placed by North Carolina Railroad in Norfolk
Southern, specifically the future of North Carolina Railroad for an
entire century, for the benefit and protection of North Carolina
Railroad and its shareholders, which include the State of North
Carolina.
48. The unique relationship created by the leases constituted
a fiduciary relationship such that Norfolk Southern, as holder and
maintainer of the assets of North Carolina Railroad, owed a
fiduciary duty to North Carolina Railroad.
49. This fiduciary duty imposed a duty of good faith and fair
dealing upon Norfolk Southern to act in the best interests of North
Carolina Railroad in maintaining and improving the railroad that
was leased to Norfolk Southern.
50. To the extent that Norfolk Southern may have "improved"
the railroad in a manner such that any improvements or replacement
property would not become the property of North Carolina Railroad
at the expiration of the leases or refused to convey and return
such property, rights, and interests pertaining thereto, Norfolk
Southern has acted in its own interests and to the detriment of
North Carolina Railroad. Any such actions constitute a breach of
the fiduciary duty owed from Norfolk Southern to North Carolina
Railroad.
51. Norfolk Southern, in its exclusive management, control
and operation of North Carolina Railroad, has a duty not to usurp
or unfairly discourage corporate business opportunities of North
Carolina Railroad.
52. By refusing or threatening to refuse to return sufficient
assets to operate the railroad and diverting or threatening to
divert traffic away from the railroad, Norfolk Southern has caused
or attempted to cause a reduction in the amount of traffic on the
railroad and sought to disadvantage North Carolina Railroad as
compared to Norfolk Southern.
53. North Carolina Railroad has been damaged by Norfolk
Southern's breach of fiduciary duty in an amount in excess of
$10,000, and is entitled to recover such damages in this action.
FIFTH CLAIM FOR RELIEF
(Constructive Fraud)
54. The allegations contained in the preceding paragraphs of
this complaint are incorporated herein by reference.
55. As described more fully in the preceding paragraphs of
this complaint, a fiduciary relationship existed between Norfolk
Southern and North Carolina Railroad.
56. To the extent that Norfolk Southern has availed itself of
opportunities to improve the railroad that was leased pursuant to
the leases, but has made the improvements or attempted to classify
improvements in such a manner as to prevent the assets from being
restored to North Carolina Railroad at the expiration of the leases
and has withheld information about such properties, rights, and
related interests, Norfolk Southern has violated the confidence and
trust that North Carolina Railroad placed in it by virtue of
entering into a 99-year lease for Norfolk Southern to maintain
complete control of virtually all of North Carolina Railroad's
assets. Norfolk Southern has publicly and unfairly threatened to
divert traffic away from North Carolina Railroad to other Norfolk
Southern routes including the route(s) created by the merger of
Southern Railway Company or Southern Railway System and Norfolk &
Western Railway Co., and provided incomplete and inaccurate
information about the property of North Carolina Railroad and the
income derived from its use therefrom. Furthermore, North Carolina
Railroad has been deceived by any such actions and incurred
attorneys' fees, consultants' fees, and other expenses in an
attempt to gain information or verify information provided by
Norfolk Southern.
57. Furthermore, to the extent that 75% of North Carolina
Railroad is owned by the taxpayers of the State of North Carolina,
any such actions by Norfolk Southern have been injurious to the
public interest of the State of North Carolina.
58. The actions of Norfolk Southern described herein
constitute constructive fraud.
59. North Carolina Railroad has been damaged by the
constructive fraud of Norfolk Southern to the extent that a
complete railroad, including all improvements and replacement
property thereupon, and the revenue potential thereto were not
returned to North Carolina Railroad at the expiration of the 1895
lease and 1939 lease. The damage to North Carolina Railroad was
proximately caused by Norfolk Southern's constructive fraud.
60. North Carolina Railroad has been damaged by the
constructive fraud of Norfolk Southern in an amount in excess of
$10,000, and North Carolina Railroad is entitled to recover such
damages of Norfolk Southern in this action.
SIXTH CLAIM FOR RELIEF
(Constructive Trust)
61. The allegations contained in the preceding paragraphs of
this complaint are incorporated herein by reference.
62. As stated previously in this complaint, Norfolk Southern
owed a duty as lessee/operator and a fiduciary duty to North
Carolina Railroad with respect to all matters involving the leases.
63. Norfolk Southern has improperly benefited from its breach
of the fiduciary duty that it owed to North Carolina Railroad
pursuant to the relationship between the parties.
64. Upon information and belief, Norfolk Southern obtained
legal title to improvements to the railroad that was leased to
Norfolk Southern in violation of a duty owed to North Carolina
Railroad. Upon information and belief, this property is still
being held by Norfolk Southern.
65. Upon information and belief, Norfolk Southern obtained
legal title to replacement property to which North Carolina
Railroad was entitled. Upon information and belief, this
replacement property is still being held by Norfolk Southern.
66. A constructive trust for the benefit of North Carolina
Railroad should be imposed upon all improvements and replacement
property that Norfolk Southern improperly titled in itself, and
Norfolk Southern should be enjoined from disposing of these assets.
SEVENTH CLAIM FOR RELIEF
(Receivership)
67. The allegations contained in the preceding paragraphs of
this complaint are incorporated herein by reference.
68. North Carolina Railroad has an ownership right in
property that is the subject of this action. Specifically, North
Carolina Railroad has an ownership interest in the original leased
property and all improvements and replacement property and the
income derived therefrom relating to the railroad that was leased
to Norfolk Southern.
69. The property described in the preceding paragraph and the
income derived therefrom is effectively in the possession of
Norfolk Southern, the adverse party in this action, and Norfolk
Southern currently has complete control over the property and the
income from said property.
70. North Carolina Railroad is in danger of losing
substantial profits to which it is entitled during the pendency of
this litigation because Norfolk Southern continues to possess,
maintain and have complete control over the property and revenues
that are the subject of this action. North Carolina Railroad is
informed, and believes, that substantial waste of the assets of the
railroad may occur during the pendency of this litigation and that
the income thereto retained will be retained by Norfolk Southern
and will not be paid to its rightful owner, North Carolina Railroad
and its shareholders.
71. If Norfolk Southern's control over assets of North
Carolina Railroad is allowed to continue, any judgment that North
Carolina Railroad receives in this action may be rendered
ineffectual because North Carolina Railroad's assets will have been
wasted and the value thereof greatly diminished. The 1895 and 1939
leases have expired, and therefore Norfolk Southern's corporate
authority under the leases to exercise the rights, franchises, and
privileges of the plaintiff has expired, subject only to the
continuing duties imposed by the Interstate Commerce Act as revised
and common law.
72. Pursuant to N.C. Gen. Stat. Sections 1-502 and 1-507.1, and
this court's inherent equity power, North Carolina Railroad is
entitled to have a receiver appointed by the court to maintain the
assets and to protect and collect the income from the assets leased
to Norfolk Southern that are in dispute in this action during the
pendency of this litigation in order to prevent the loss of
substantial assets and income of North Carolina Railroad.
EIGHTH CLAIM FOR RELIEF
(Accounting)
73. The allegations contained in the preceding paragraphs of
this complaint are incorporated herein by reference.
74. As described more fully in preceding paragraphs of this
complaint, a fiduciary relationship existed between Norfolk
Southern and North Carolina Railroad.
75. Moreover, the actions of Norfolk Southern described
herein constitute constructive fraud.
76. North Carolina Railroad is entitled to a preliminary and
final accounting from Norfolk Southern regarding all aspects of its
operation of a railroad over property belonging to North Carolina
Railroad, including its income derived therefrom and reasonable
expenses relating thereto.
NINTH CLAIM FOR RELIEF
(Declaratory Judgment -- Taxes)
77. The allegations contained in the preceding paragraphs of
this complaint are incorporated herein by reference.
78. The 1895 lease provides that Norfolk Southern
agrees to pay for and on account of the party
of the first part [North Carolina Railroad]
all taxes and assessments lawfully imposed
upon the said leased property, or upon the
franchise of [North Carolina Railroad], or its
income, whether by the State of North
Carolina, or any county, city, town or
township thereof, or by the United States.
All of such taxes and assessments shall be
paid by [Southern], so as to entirely relieve
[North Carolina Railroad] from payment of
taxes of any nature whatever, during the
continuance of this lease, upon the property
leased or the franchise of the party of the
first part for its income from the lease
property.
79. North Carolina Railroad may incur substantial federal,
state and/or local tax liability as a result of the return of North
Carolina Railroad's property pursuant to the terms of the 1895
lease.
80. Pursuant to the terms of the 1895 lease, North Carolina
Railroad is entitled to reimbursement for federal, state or local
taxes that it incurs as a result of any property that is recovered
by North Carolina Railroad.
81. Because North Carolina Railroad and Norfolk Southern, as
stated above, dispute what property is to be returned by Norfolk
Southern to North Carolina Railroad given the termination of the
1895 lease, and because North Carolina Railroad and Norfolk
Southern also dispute the apportionment of tax liability upon any
returned property, an actual controversy exists as to the rights
and interests of the parties regarding tax liability pursuant to
the 1895 lease.
82. North Carolina Railroad seeks relief in resolving this
controversy pursuant to the Declaratory Judgment Act, N.C. Gen.
Stat. Section 1-253.
83. North Carolina Railroad seeks a declaration as to Norfolk
Southern's liability for federal, state and local taxes that North
Carolina Railroad may incur as the result of any property recovered
by it at the end of the 1895 lease.
84. North Carolina Railroad is entitled to, and seeks, an
order declaring that Norfolk Southern is responsible for all
federal, state and local taxes incurred by North Carolina Railroad
upon property recovered by North Carolina Railroad at the
termination of the 1895 lease.
TENTH CLAIM FOR RELIEF
(Statutory Strict Liability)
85. The allegations contained in the preceding paragraphs of
this complaint are incorporated herein by reference.
86. The North Carolina Oil Pollution and Hazardous Substances
Control Act provides that:
Any person having control over oil or other hazardous
substances which enter the waters of the State in
violation of this Park shall be strictly liable, without
regard to fault, for damages to persons or property,
public or private, caused by such entry, subject to the
exception enumerated in G. S. 143-215.83(b).
The exceptions referred to do not excuse Norfolk Southern from
liability.
87. Upon information and belief, Norfolk Southern had and
continues to have control over oil and other hazardous substances
which entered or may have entered the waters of the state in
violation of N. C. Gen. Stat. Section 143-215.83, et. seq.
88. As a result of the release of the oil and other hazardous
substances described above, North Carolina Railroad has incurred
damages in excess of $10,000.
89. Norfolk Southern is strictly liable for the damages
incurred by North Carolina Railroad, and is responsible for the
investigation and remediation of the Property.
ELEVENTH CLAIM FOR RELIEF
(CERCLA)
90. The allegations contained in the preceding paragraphs of
this complaint are incorporated herein by reference.
91. Each Defendant is a "person" within the meaning of the
Comprehensive Environmental Response, Compensation and Liability
Act ("CERCLA") Section 101(21), 42 U.S.C. Section 9601(21).
92. CERCLA Section 107, 42 U.S.C. Section 9607, as amended, provides in
part:
(a) Notwithstanding any other provision or rule of
law, and subject only to the defenses set
forth in subsection (b) of this section --
(1) the owner and operator . . . of
a facility,
(2) any person who at the time of
disposal of any hazardous
substances owned or operated
any facility at which such
hazardous substances were
disposed of,
(3) any person who by contract,
agreement or otherwise arranged
for disposal or treat-
ment, . . . of hazardous
substances . . ., at any
facility . . ., and
(4) any person who accepts or
accepted hazardous substances
for transport . . ., shall be
liable for --
(A) all costs of removal or
remedial action incurred
by the United States
Government or a State or
an Indian Tribe not
inconsistent with the
national contingency
plan;
93. CERCLA Section 113(f), 42 U.S.C. Section 9613(f), as amended,
provides in part:
(a) Any person may seek contribution from any
other person who is liable or potentially
liable under Section 9607(a) of this
title, during or following any civil
action under Section 9606 of this title
or under Section 9607 of this title.
94. Upon information and belief, release of hazardous
substances has occurred on North Carolina Railroad's property
during the period that it has been used by or leased to Norfolk
Southern, and the property is a "facility" as defined at CERCLA
Section 101(9), 42 U.S.C. Section 9601(9).
95. Upon information and belief, Norfolk Southern is or has
been an "operator" of and a "transporter" on North Carolina
Railroad's property as defined at CERCLA Section 101(20)(A), 42 U.S.C.
Section 9601(20)(A) when each alleged release of oil or other hazardous
substance occurred.
96. North Carolina Railroad is entitled to past and future
response costs to be incurred by it for inspection and remediation
of the Property, including but not limited to attorneys fees and
interest as allowed by law, pursuant to CERCLA Sections 107 and 113(f),
42 U.S.C. Sections 9607 and 9613(f). Such costs are in excess of
$10,000.
TWELFTH CLAIM FOR RELIEF
(Trespass)
97. The allegations contained in the preceding paragraphs of
this complaint are incorporated herein by reference.
98. Upon information and belief, Norfolk Southern has been
shipping, using, storing, and disposing of petroleum products and
other hazardous and nonhazardous substances on North Carolina
Railroad's property since the commencement of the 1895 lease.
99. Such shipping, use, storage, and disposal of petroleum
products and other hazardous and nonhazardous substances has or may
have contaminated both property which remains in the possession of
Norfolk Southern, as well as any property which has been or may be
returned to North Carolina Railroad by Norfolk Southern.
100. Upon information and belief, Norfolk Southern has allowed
the use, storage, and disposal of petroleum products and other
hazardous and nonhazardous substances on North Carolina Railroad's
property since the commencement of the 1895 lease by tenants and
other parties encroaching on North Carolina railroad's property.
Such activities have contaminated both property which remains in
the possession of Norfolk Southern, as well as property which has
been or may be returned to North Carolina Railroad by Norfolk
Southern.
101. Although Norfolk Southern's leases have expired,
petroleum products and other hazardous and nonhazardous substances
continue to be present on North Carolina Railroad's property,
without North Carolina Railroad's consent, which is a continuing
trespass against North Carolina Railroad's possessory interest in
North Carolina Railroad's property.
102. In addition, upon information and belief, property
returned to North Carolina Railroad by Norfolk Southern was or may
have been contaminated by Norfolk Southern and remains or may
remain contaminated without North Carolina Railroad's consent,
which is a continuing trespass against North Carolina Railroad's
possessory interest in North Carolina Railroad's property.
103. As a result of the trespasses upon the property, North
Carolina Railroad is entitled to recover the damages in excess of
$10,000.
THIRTEENTH CLAIM FOR RELIEF
(Common Law Strict Liability)
104. The allegations contained in the preceding paragraphs of
this complaint are incorporated herein by reference.
105. The shipping, use, storage, and disposal of hazardous
materials are ultrahazardous activities.
106. Norfolk Southern has shipped, used, stored, and
disposed of hazardous materials on North Carolina Railroad's property.
107. Upon information and belief, there have been or may have
been numerous spills and discharges of hazardous materials on North
Carolina Railroad's property during the period that Norfolk
Southern operated North Carolina Railroad's property.
108. As a direct result of Norfolk Southern's shipping, use,
storage, and disposal of petroleum products and other hazardous
substances, North Carolina Railroad's Property has been or may have
been contaminated and Norfolk Southern is strictly liable for such
contamination and the resulting damage.
109. As a result of such contamination by Norfolk Southern,
North Carolina Railroad is entitled to the damages in excess of
$10,000.
FOURTEENTH CLAIM FOR RELIEF
(Breach of Contract)
110. The allegations contained in the preceding paragraphs of
this complaint are incorporated herein by reference.
111. The leases between Norfolk Southern and North Carolina
Railroad call for Norfolk Southern to maintain North Carolina
Railroad's property "in equally as good condition and repair" as
the property was on the date of execution of the 1895 lease, and to
return the property at the termination of the 1895 lease "in like
good condition and repair."
112. Norfolk Southern has failed to maintain North Carolina
Railroad's property, in violation of the terms of the leases.
113. Due to Norfolk Southern's contamination of North Carolina
Railroad's property, North Carolina Railroad's property is not "in
like good condition and repair" as it was at the commencement of
the 1895 lease, in violation of the terms of the leases.
114. North Carolina Railroad has made numerous oral and
written requests for Norfolk Southern to investigate and remediate
the environmental contamination on North Carolina Railroad's
property, but Norfolk Southern has refused to assume responsibility
for or pay for such investigation and remediation activities.
115. Norfolk Southern has breached its obligations under the
terms of the leases and thereby damaged North Carolina Railroad in
an amount in excess of $10,000.
FIFTEENTH CLAIM FOR RELIEF
(Negligence)
116. The allegations contained in the preceding paragraphs of
this complaint are incorporated herein by reference.
117. Norfolk Southern had and continues to have a duty to
conduct its activities in a manner that did not contaminate the
soil and ground water.
118. Upon information and belief, Norfolk Southern failed to
exercise reasonable care in the shipping, use, storage, and
disposal of petroleum products and other hazardous substances.
119. Norfolk Southern had and continues to have a duty to take
reasonable measures to ensure that third parties using North
Carolina Railroad property (including tenants of Norfolk Southern
and parties allowed by Norfolk Southern to encroach on North
Carolina Railroad property) conducted their activities in a manner
that did not contaminate the soil and ground water.
120. Upon information and belief, Norfolk Southern failed to
exercise reasonable care in managing North Carolina Railroad
property to prevent the release, discharge or disposal of petroleum
products and other hazardous substances by third parties.
121. Norfolk Southern's negligence is the proximate cause of
the contamination of North Carolina Railroad's property and Norfolk
Southern's negligence is the proximate cause of damages to North
Carolina Railroad in excess of $10,000.
122. In addition, North Carolina Railroad is entitled to
punitive damages from Norfolk Southern because of their willful and
wanton refusal to initiate any type of investigation or clean-up
activity, despite repeated requests by North Carolina Railroad.
SIXTEENTH CLAIM FOR RELIEF
(Negligence per se)
123. The allegations contained in the preceding paragraphs of
this complaint are incorporated herein by reference.
124. Federal, state, and local environmental laws were enacted
to protect the public health and welfare, and North Carolina
Railroad is a member of the class of persons which those laws are
designed to protect.
125. Norfolk Southern has a duty not to violate the various
federal, state, and local environmental laws.
126. Upon information and belief, Norfolk Southern violated,
and permitted others to violate, numerous federal, state, and local
environmental laws.
127. Norfolk Southern's violations, and its allowance of
violations by others, of federal, state, and local environmental
laws constitutes negligence per se.
128. Norfolk Southern's negligence per se is the proximate
cause of the contamination of North Carolina Railroad's property
and Norfolk Southern's negligence per se is the proximate cause of
damages to North Carolina Railroad in excess of $10,000.
129. In addition, North Carolina Railroad is entitled to
punitive damage from Norfolk Southern because of its willful and
wanton refusal to initiate any type of investigation or clean-up
activity.
SEVENTEENTH CLAIM FOR RELIEF
(Waste)
130. The allegations contained in the preceding paragraphs of
this complaint are incorporated herein by reference.
131. Norfolk Southern had and continues to have an obligation
to use reasonable diligence to treat the premises in such a manner
that no injury was done to North Carolina Railroad's property.
132. Upon information and belief, Norfolk Southern failed to
use reasonable diligence in the shipping, use, storage, and
disposal of petroleum products and other hazardous substances on
North Carolina Railroad's property.
133. Upon information and belief, Norfolk Southern failed to
use reasonable diligence in managing North Carolina Railroad
property to prevent the release, discharge or disposal of petroleum
products and other hazardous substances by third parties (including
tenants of Norfolk Southern and parties allowed by Norfolk Southern
to encroach on North Carolina Railroad property).
134. Norfolk Southern's failure to exercise reasonable
diligence in its activities on and management of North Carolina
Railroad's property resulted in soil and ground water
contamination.
135. Norfolk Southern's waste is the proximate cause of the
contamination of North Carolina Railroad's property and Norfolk
Southern's waste has been the proximate cause of damages to North
Carolina Railroad in excess of $10,000.
EIGHTEENTH CLAIM FOR RELIEF
(Declaratory Judgment)
136. The allegations contained in the preceding paragraphs of
this complaint are incorporated herein by reference.
137. Because North Carolina Railroad and Norfolk Southern
dispute whether the property is environmentally contaminated, and
whether Norfolk Southern is responsible for investigating and
remediating any contamination present on the property, an actual
controversy exists.
138. North Carolina Railroad seeks relief in resolving this
controversy pursuant to the Declaratory Judgment Act, N.C. Gen.
Stat. Section 1-253.
139. North Carolina Railroad is entitled to, and seeks, an
order pursuant to Section 1-253, et. seq., of the North Carolina
General Statutes declaring Norfolk Southern responsible for
investigating and remediating North Carolina Railroad's property
and any adjoining properties which have been affected by the
contamination on the property.
WHEREFORE, plaintiff North Carolina Railroad respectfully
requests:
1. That the Court declare the rights of North Carolina
Railroad and the defendants under the 1895 and 1939 leases as of
January 1, 1995, including North Carolina Railroad's ownership
rights and that Norfolk Southern is responsible for all taxes
incurred by North Carolina Railroad as a result of any property
recovered at the end of the 1895 lease;
2. That the Court order that property improperly titled in
the name of defendants be titled in the name of North Carolina
Railroad;
3. That plaintiff North Carolina Railroad receive specific
performance of the 1895 and 1939 leases;
4. That the Court impose a constructive trust upon the
railroad for the benefit of North Carolina Railroad;
5. That a receiver be appointed to maintain the assets and
to protect and collect the income from the assets leased to Norfolk
Southern that are in dispute in this action during the pendency of
this litigation;
6. That the Court order a preliminary and final accounting
from Norfolk Southern regarding all aspects of its operation of a
railroad over property belonging to North Carolina Railroad,
including its income derived therefrom and expenses relating
thereto;
7. That the Court enter a declaratory judgment pursuant to
Section 1-253, et. seq., of the North Carolina General Statutes
declaring Norfolk Southern responsible for investigating and
remediating North Carolina Railroad's property and any adjoining
properties which have been affected by the contamination on North
Carolina Railroad's property;
8. That the Court order Norfolk Southern to investigate and
remediate any contamination on North Carolina Railroad's property;
9. That the Court declare that North Carolina Railroad is
entitled to recover its past and future response cost pursuant to
CERCLA.
10. That North Carolina Railroad recover its actual damages
in an amount to be proven at trial;
11. That North Carolina Railroad recover punitive damages;
12. That the costs of this action be taxed against
defendants;
13. For a trial by jury on all issues so triable; and
14. For such other relief as the Court may deem just and
proper.
This the 20th day of September 1996.
PETREE STOCKTON, L.L.P.
By: /s/ John L. Sarratt
John L. Sarratt
Karen F. Gray
4101 Lake Boone Trail, Suite 400
Raleigh, NC 27607-6519
Telephone: (919) 420-1700
Exhibit 99.2
UNITED STATES OF AMERICA
SURFACE TRANSPORTATION BOARD
_________________________________
FINANCE DOCKET NO. 33134
_________________________________
NORTH CAROLINA RAILROAD COMPANY --
PETITION TO SET TRACKAGE COMPENSATION
AND OTHER TERMS AND CONDITIONS --
NORFOLK SOUTHERN RAILWAY COMPANY,
NORFOLK & WESTERN RAILWAY COMPANY
AND ATLANTIC AND EAST CAROLINA
RAILWAY COMPANY
_________________________________
PETITION TO SET TRACKAGE COMPENSATION
EXPEDITED ACTION REQUESTED
Pursuant to Part 1117 of the Board's Rules, 49 C.F.R.
Section 1117, North Carolina Railroad Company ("NCRR"), a common
carrier by railroad subject to the Interstate Commerce Act, 49
U.S.C. Sections 10101 et seq., hereby petitions the Board to institute
a proceeding to determine the compensation and other terms and
conditions for the continued operation over NCRR's rail lines by
Norfolk Southern Railway Company (together with its predecessor
railroads, "NS"), Norfolk & Western Railway Company ("N&W") and
the Atlantic and East Carolina Railway Company ("A&EC" or,
together with N&W and NS, "NS"), three common carriers by
railroad that are wholly owned subsidiaries of Norfolk Southern
Corporation. NCRR also requests that the Board bifurcate the
proceeding into two phases: in the first phase, the Board should
determine the appropriate methodology for valuing the NCRR Line.
In the second phase, the Board should apply that methodology to
the facts of this case. Finally, NCRR requests that the Board
prescribe a procedural schedule for the first phase of the
proceeding.
NCRR is a North Carolina corporation, 75 percent of
whose stock is owned by the State of North Carolina. NCRR's rail
lines (collectively, the "NCRR Line") are situated entirely in
North Carolina and extend approximately 317 miles between
Charlotte, in Mecklenburg County, and Morehead City, in Carteret
County, through the cities of Greensboro, Raleigh and Goldsboro.
NS has operated the NCRR Line pursuant to two operating lease
agreements that expired by their own terms on December 31, 1994
and January 1, 1995. Despite lengthy negotiations and a
conditional agreement submitted to NCRR's shareholders, the
parties have been unable to reach agreement on terms that are
acceptable to NCRR's shareholders. NCRR is thus seeking the
prescription of appropriate terms by the Board.
Under the Interstate Commerce Act, 49 U.S.C.
Section 11323(a)(6), this Board has exclusive jurisdiction to determine
certain terms and conditions under which NS may continue to
operate over the NCRR Line in the absence of an agreement between
the parties, including a reasonable rental. Thompson v. Texas
Mexican Railway Co., 328 U.S. 134, 147-50 (1946). While
continuing to operate the NCRR Line, NS has ceased all rental
payments to NCRR. Because the rental income from use of the NCRR
Line is NCRR's primary source of revenue, NS's refusal to
continue rent payments poses an immediate threat to NCRR's very
subsistence. It is therefore imperative that the Board: (a)
expeditiously institute a proceeding to determine the reasonable
rental for use of the line; and (b) set interim compensation
pending the ultimate determination of a reasonable rental in that
proceeding. NCRR is simultaneously filing a petition seeking
such interim relief.
In support of its petition, NCRR states as follows:
1. NCRR is a corporation incorporated by, and under
the laws of, the State of North Carolina. Seventy-five percent
(75%) of the stock of NCRR is owned by the State of North
Carolina and twenty-five percent (25%) of the stock is owned by
private shareholders. Pursuant to its charter, NCRR was
organized to provide transportation by rail carrier.
2. Norfolk Southern Railway Company, a common
carrier by railroad incorporated in the Commonwealth of Virginia,
is a wholly owned subsidiary of Norfolk Southern Corporation, a
railroad holding company incorporated in Virginia.
3. NCRR is currently a non-operating common carrier
by railroad. NCRR owns and has operated in the past a line that
is entirely situated in the State of North Carolina and extends
for a distance of about 317 miles between the city of Charlotte,
in Mecklenburg County, and the city of Morehead City, in Carteret
County. From Charlotte the NCRR Line extends in a northeasterly
direction to Greensboro, from there in a southeasterly direction
to Raleigh, from Raleigh in a southeasterly direction to
Goldsboro, and from there in a southeasterly direction to
Morehead City. Part of the NCRR Line forms a part of the Norfolk
Southern main line between Washington, D.C. and Atlanta, GA. A
map of the NCRR Line is attached as Exhibit 1 hereto.
4. NCRR itself operated the Charlotte-Goldsboro
segment of the NCRR Line until 1871. A predecessor of NCRR,
Atlantic & North Carolina Railroad Company, operated the
Goldsboro-Morehead City portion of the NCRR Line until 1904 and
for the period 1935-39. See, e.g., Atlantic & North Carolina
R.R. Lease, 233 I.C.C. 644-45 (1939); Norfolk Southern R.R.
Receivers Abandonment, 221 I.C.C. 258-59 (1937).
On August 16, 1895, NCRR and the Southern Railway
Company, a predecessor of NS, executed an agreement modifying an
1871 agreement with Southern's predecessor, whereby NCRR leased
to Southern the segment of the NCRR Line between Charlotte and
Goldsboro including, among other things, the line's
"superstructure, roadbed and right of way incident thereto,"
including all "rights, franchises, and privileges," for a term of
ninety-nine years from January 1, 1896, the date of effectiveness
of the Agreement. See August 16, 1895 Agreement at p. 2 (Exhibit
3). The rental agreed upon by the parties consisted primarily of
an annual amount that was set at $266,000 for each year from
January 1, 1896 to December 31, 1901, and at $286,000 for each
year thereafter for the 99-year term of the lease. In addition,
Southern was obligated to pay all taxes and assessments on the
leased line.
Southern was also obligated to maintain the leased
line in "equally as good condition and repair as the property is
at the date of this lease, or to keep, in the place of the same,
like things of equally good condition and repair." Id. at 5. NS
was also required to return to NCRR at the end of the contract's
term "the said railroad, road-bed, superstructure, depot, house,
buildings, shops, engines, cars, fixtures and other property, and
all and every part thereof, in like good condition and repair; or
other property, when any part of said property shall be worn out,
destroyed or abandoned, as good in quality and substance and in
like good order and repair." Id. Furthermore, the Agreement
specified that NS would have no claim "for any improvement of
said property conveyed by this lease, over the condition of the
said property at the date of this lease, but all such
improvements shall be and remain the property of [NCRR] ... ."
Id.
5. On August 30, 1939, the Atlantic and North
Carolina Railroad Company and the Atlantic and East Carolina
Railway Company, a predecessor of NS, executed a lease agreement
whereby the Atlantic and North Carolina Railroad Company leased
to NS the segment of the NCRR Line between Goldsboro and Morehead
City for a term of 25 years. The leased property included, among
other things, the line's "superstructure, road bed [and] right of
way incident thereto." Aug. 30, 1939 Lease and Indenture at 2
(Exhibit 4). The annual rental was initially set at $60,500, as
augmented by a percentage of 1 1/2% to 4% of the lessee's
incremental operating revenues if these revenues exceeded certain
prescribed levels. The lessee agreed to maintain the line and
return it at the termination of the lease in like good condition
and repair. See id. at 8.
6. The Aug. 30, 1939 lease agreement was approved by
the Commission in Atlantic & North Carolina R.R. Lease, 233
I.C.C. 644 (1939). The annual rental was revised by indenture
agreements executed on July 1, 1943 and January 1, 1951. See
Atlantic & North Carolina R.R. Lease, 257 I.C.C. 811 (1944). By
an amended lease agreement executed on August 19, 1954, the
parties agreed to extend the lease by one-year periods upon
notice given by the lessee for a term of years to end on December
31, 1994. The August 19, 1954 amended lease agreement was
approved by the Commission in Atlantic & North Carolina R.R.
Lease, 290 I.C.C. 802 (1954).
7. Both of the lease agreements under which NS has
operated the NCRR Line expired by their own terms on December 31,
1994 and January 1, 1995. The parties initiated negotiations
with respect to a new lease in 1992 and, after three years of
negotiations finally reached a conditional Lease Extension
Agreement in August, 1995 retroactive to the expiration dates of
the prior leases. The Agreement was subject to, among other
things, approval of NCRR's stockholders, including approval by a
majority of the outstanding shares of NCRR's private shareholders
(i.e., shareholders other than the State of North Carolina). A
meeting of the NCRR private shareholders was held on December 15,
1995. Certain shareholders, who believed that the rent and
property settlement specified in the conditional agreement was
substantially below market value, organized an effort to defeat
the agreement through a boycott of the shareholders meeting,
which would prevent the formation of a quorum.
8. At the shareholders meeting the inspector of
elections announced that the State of North Carolina and 50.4
percent of the private shareholders were represented in person or
by proxy. A vote was thus held and a majority of those
shareholders voting voted to approve the Agreement.
9. The validity of the meeting, however, was
challenged in the United States District Court for the Eastern
District of North Carolina on the ground that no quorum was in
fact present. On July 29, 1996, the Court found that there was
no quorum at the meeting and permanently enjoined NCRR from
implementing the terms of the Agreement. See Rucker v. McNair,
No. 5:95-CV-1054-B0(2) (E.D.N.C. July 29, 1996). A copy of the
district court's decision is attached hereto as Exhibit 5. As a
result, the parties have failed to reach agreement on
compensation and other terms for NS's use of the NCRR Line.1/
1/ In Finance Docket No. 32820, NCRR and NS jointly filed a
petition for a lease extension based on the conditional
Lease Extension Agreement. Because the conditions to the
Agreement have not been satisfied, that exemption has now
become moot and NCRR reserves its rights to take any
appropriate action if necessary.
10. NS is still operating the Line, despite the
absence of any agreement with NCRR. For the first seven months
of 1996, NS paid NCRR $680,700 monthly. On August 9, 1996,
however, NS advised NCRR that it would no longer pay rent under
the conditional Lease Extension Agreement. As of that date,
therefore, NS has not been paying to NCRR any rent whatsoever.
11. It is undisputed that NCRR owns certain of the
assets comprising the NCRR Line, including, without limitation,
the roadbed, track and right of way. Ownership rights with
respect to certain other assets are in dispute between NCRR and
NS.
12. On September 20, 1996, NCRR filed a complaint
(Exhibit 2 hereto, without attachments) with the Superior Court
of Wake County, North Carolina, a court having jurisdiction to
adjudicate these disputed questions of title, property ownership
and other claims. In that complaint, NCRR has asked the court to
determine that NCRR is entitled to all improvements, betterments,
additions and properties related to the NCRR Line. A copy of the
complaint filed with the Superior Court is attached hereto as
Exhibit 6.
13. NS continues to operate over the NCRR Line, and
has not requested authority from the Commission to discontinue
service over any portion of it.2/ To the best of NCRR's
knowledge, NS has continued to maintain the NCRR Line and pay the
other expenses of operation related thereto.
2/ Part of the line is now operated by N&W pursuant to a
notice of exemption filed by N&W and its parent NS in
Finance Docket No. 32961. NCRR has filed a petition
to revoke that exemption.
14. When an agreement under which a tenant carrier
operates over the line of a landlord carrier expires and the
parties fail to agree on rental compensation, the Commission has
exclusive jurisdiction to determine the reasonable rental
compensation for continued use of the line under 49 U.S.C.
Section 11343. Texas-Mexican Railway Co., 328 U.S. at 146-47, 149.
RELIEF REQUESTED
On the basis of the foregoing, NCRR respectfully
requests that the Board institute a proceeding under the modified
procedure, 49 C.F.R. Section 1112, to fix a reasonable rental for NS's
operation over the NCRR Line, for the future and retroactively to
January 1, 1995 -- the time of expiration of the lease agreements
between NCRR and NS. Consistent with past practice in trackage
compensation cases, the Board should bifurcate the proceeding:
the methodology for valuing the line should be developed in the
first phase and applied to the facts in a second phase. As the
Commission has found, "it would be less burdensome on all
concerned to resolve any disputes as to the proper methodology
before having the parties submit the actual data to be used in
determining the valuation base and interest rental rate."
Atchison, Topeka & Santa Fe Railway Company -- Operating Rights
- -- Southern Pacific Transportation Co., 8 I.C.C.2d 297, 304
(1992). NCRR also requests that the Board adopt the following
schedule pursuant to its modified procedure for the first phase
of the proceeding:
Opening brief and 60 days from service of
evidence of NCRR Order instituting proceeding
Reply brief and 30 days from date due of
evidence of NS opening brief
Rebuttal brief and 20 days from date due of
evidence of NCRR reply brief
NCRR also requests that the Board retain any and all information
pertaining to the NCRR Line that has been reported or will be
reported by NS to the Board.
Respectfully submitted,
/s/Betty Jo Christian
Scott M. Saylor Betty Jo Christian
General Counsel Pantelis Michalopoulos
North Carolina Railroad STEPTOE & JOHNSON
Company 1330 Connecticut Avenue, NW
3200 Atlantic Avenue Washington, DC 20036
Suite 110 (202) 429-3000
Raleigh, North Carolina 27604
Attorneys for North Carolina
Railroad Company
Dated: September 23, 1996
<PAGE>
UNITED STATES OF AMERICA
SURFACE TRANSPORTATION BOARD
_________________________________
FINANCE DOCKET NO. 33134
_________________________________
NORTH CAROLINA RAILROAD COMPANY --
PETITION TO SET TRACKAGE COMPENSATION
AND OTHER TERMS AND CONDITIONS --
NORFOLK SOUTHERN RAILWAY COMPANY,
NORFOLK & WESTERN RAILWAY COMPANY
AND ATLANTIC AND EAST CAROLINA
RAILWAY COMPANY
_________________________________
PETITION FOR INTERIM RELIEF
By a Petition to set trackage compensation, filed on
the same date in this proceeding, North Carolina Railroad Company
("NCRR") has asked the Board to prescribe the compensation and
other terms for the continued operation by Norfolk Southern
Railway Company ("NS"), Norfolk & Western Railway Company ("N&W")
and the Atlantic and East Carolina Railway Company ("A&EC" or,
with NS and N&W, "NS") over lines owned by NCRR after expiration
of a lease. By this Petition for Interim Relief, NCRR
respectfully requests that the Board grant interim compensation
and prescribe certain other interim terms during the pendency of
this proceeding. The requested relief is of the utmost
importance to NCRR because, in the absence of any agreement
between NCRR and NS regarding NS's continued use of NCRR's
317-mile line, NS has ceased making any rental payments to NCRR.
The line here at issue is NCRR's principal asset, and the rent
previously received from NS constitutes the bulk of its total
income. In these circumstances, NCRR simply cannot afford to
await the outcome of this compensation proceeding before
receiving any further rent whatsoever.
As explained below, for a period of 19 months after
expiration of the old leases, NS continued to pay rent to NCRR:
NS voluntarily paid rental for 1995 in the amount of $8 million.
It also continued to pay rent at a level of $680,700 per month
through July, 1996. While NCRR does not believe this amount is
adequate as permanent compensation, and the Agreement setting
forth this amount was not approved by NCRR's shareholders, it
does provide an appropriate minimum basis for a prescription of
interim compensation. NCRR thus requests that the Board set
interim compensation at $680,700 per month net of all
maintenance, capital improvements, taxes and assessments -- the
level paid by NS during the period from January through July,
1996. Since NS itself voluntarily paid this level of
compensation for some 19 months, the amount can fairly be
regarded as a minimally acceptable amount for NS to continue to
pay during the pendency of this proceeding and related state
court proceeding.
BACKGROUND
NCRR is a corporation incorporated by, and under the
laws of, the State of North Carolina. Seventy-five percent of
the stock of NCRR is owned by the State of North Carolina and
twenty-five percent is owned by private shareholders. NCRR
receives no financial support from the State and in the past
virtually all of its total income has consisted of compensation
received from NS for its use of the NCRR line. See pp. 8-9,
infra.
NCRR's rail lines (collectively, the "NCRR Line") are
situated in the State of North Carolina and extend for
approximately 317 miles between Charlotte, in Mecklenburg County,
and Morehead City, in Carteret County, through the cities of
Greensboro, Raleigh and Goldsboro, together with certain branch
lines. Those lines are described more fully in NCRR's petition
to set trackage compensation and other terms and conditions,
filed simultaneously in this proceeding.
NS has operated the NCRR Line pursuant to two
operating lease agreements that expired by their own terms on
December 31, 1994 and January 1, 1995. One agreement, executed
in 1895 for a 99-year term, covered the 223-mile segment of the
NCRR Line between Charlotte and Goldsboro and provided for
semi-annual payments of $143,000 to NCRR, for an annual rental of
$286,000 per year. The 1895 agreement did not contain an
escalator clause or contemplate any adjustment for inflation. As
a result, the compensation paid to NCRR has been unchanged for 99
years. The second agreement, executed in 1939 and amended in
1943, 1951 and 1954, covered the 94-mile segment of the NCRR Line
between Goldsboro and Morehead City. That agreement provided for
an annual rental of $66,500, which could be incrementally
augmented if NS's annual revenue from the line exceeded $475,000
by certain percentages of the incremental revenues. At the time
of its expiration the compensation under that second lease was
approximately $300,000 per year.
Prolonged and intense negotiations between the parties
led to a conditional Lease Extension Agreement approved by the
Directors of NCRR in August 1995. The Agreement provided for a
base annual rental of $8,000,000 for use of the NCRR Line,
retroactive to January 1, 1995, with annual adjustments for
inflation, based on the Implicit Price Deflator for the Gross
Domestic Product ("IPD-GDP") for years beyond December 31, 1995.
It also contemplated a $5 million one-time settlement payment
from NS to NCRR, in exchange for NCRR's release of NS from a
claim for NS's obligation to return to NCRR certain property upon
expiration of the Leases.
Among other things, the Agreement also contained
extensive provisions governing the rights and obligations of the
parties for various environmental liabilities and expenses.
Under these provisions, NS agreed to indemnify NCRR for any
violation by NS of applicable environmental laws and regulations.
NS also undertook primary responsibility for performing all of
NCRR's environmental obligations, subject to NCRR's oversight.
The conditional Agreement was approved by NS. It was
also submitted to a vote and approved at a shareholders meeting
convened by NCRR on December 15, 1996, although the quorum margin
for the meeting was very slim as a result of a shareholder
boycott. The vote, however, was invalidated on July 29, 1996 by
an Order of the United States District Court for the Eastern
District of North Carolina, on the basis that a quorum was not
present at the meeting. There are no on-going negotiations with
NS and the Directors of NCRR do not believe that shareholder
approval of the proposed lease agreement is possible.
ARGUMENT
I. The Board Has the Power to Set Interim Compensation
Pending Final Determination of a Petition to Fix
Compensation for Operation of a Line
In the absence of an agreement between the landlord
and tenant carriers as to the terms for continued operations
after expiration of a lease, the Board has exclusive
jurisdiction to fix a reasonable rental. Thompson v. Texas
Mexican Railway Company, 328 U.S. 134, 147-50 (1946). By
its Petition filed simultaneously in this docket, NCRR is
requesting that the Board exercise this jurisdiction and fix
reasonable compensation for NS's continued use of the NCRR Line.
The power to prescribe interim compensation is
inherent in the Board's authority to fix a reasonable
rental. Just last year the former ICC explained that, once
its jurisdiction to prescribe compensation for use of a rail
line is established, it has broad discretion to arrive at an
appropriate level of compensation. Consistent with that
discretion, it may prescribe an interim rate of compensation
pending its final determination, especially in light of "the
time it takes to develop a record and decide a compensation
dispute on the merits." See F.D. No. 32467, National
Railroad Passenger Corporation and Consolidated Rail
Corporation -- Application Under Section 402(a) of the Rail
Passenger Service Act For An Order Fixing Just Compensation,
(served July 25, 1995), slip op. at 8.1/ See also
Supplemental Order No. 4 to Service Order No. 1516,
Dardannelle & Russelville R.R. -- Authority to Operate --
Lines of Arkansas Midland R.R. (served Nov. 28, 1994)
(setting interim compensation pending ultimate determination
by the Commission), pet. for review pending in F.D. No.
32625, Dardanelle & Russellville R.R. v. Surface
Transportation Board, No. 96-3352 (8th Cir.).
1/ The Commission's jurisdiction there derived from the Rail
Passenger Service Act. Nevertheless, the Commission clearly
has the same degree of discretion once its jurisdiction to
prescribe compensation is establised, no matter whether it
derives from the Rail Passenger Service Act or, as here,
from the Interstate Commerce Act.
Similarly, in Docket No. 41201, Chicago and North
Western Transportation Co. Petition for Declaratory Order --
Right of Independent Action as to Car Hire Rates and Rules
(slip op. served Sept. 13, 1994), pet. for review dismissed,
Southern Pacific Transportation Co. v. ICC, 69 F.3d 583
(D.C. Cir. 1995), the Commission held that it may prescribe
an interim car hire rate pending final determination of a
fair level for that rate. See also Joint Petition for
Rulemaking on Car Hire Compensation, 9 I.C.C.2d 1090,
1094-95 (1993) (prescription of interim car hire rates is
consistent with the Interstate Commerce Act, which
authorized the agency to prescribe rates giving the car's
owner a fair return on its cost), pet. to reopen denied, 10
I.C.C.2d 181 (1994), pet. for review dismissed, Southern
Pacific, 69 F.3d 583 (D.C. Cir. 1995).
By the same token, the Board here clearly has the
power to prescribe interim compensation pending a final
determination of a fair level of compensation for NS's
continued use of NCRR's line.
II. Interim Compensation at the Level that NS Has Paid for the
Past 19 Months Should Be Prescribed Here
Prescription of interim compensation is clearly
warranted in the unique circumstances presented here. In
the case of a large railroad, another carrier's use of a
line for "free" during the pendency of a compensation
proceeding might be a matter of little significance, since
the compensation ultimately prescribed by the Board will be
retroactive.2/ To NCRR, however, it is a matter of
overwhelming importance. The line here at issue is NCRR's
only line of railroad, and the source of the vast bulk of
its total income. Indeed, NCRR's only other assets consist
of certain small parcels of land in Charlotte, Morehead
City, and New Bern, North Carolina, some of which are
leased.
2/ See, e.q., Arkansas & Missouri Pacific R.R., 6 I.C.C.2d
619, 630 (1990), pet. for review denied, Missouri Pacific
R.R. v. ICC, 23 F.3d 531 (D.C. Cir. 1994).
Attached to this Petition are excerpts from NCRR's
1995 Annual Report setting forth NCRR's sources of revenue.
As the Annual Report reveals, NCRR's only income for 1995,
apart from the compensation received from NS for the use of
the line here at issue and certain extraordinary one-time
items, was approximately $90,000 of rental income for the
lease of certain small parcels of land. This includes an
annual payment of $81,319 for three discrete parcels in the
City of Charlotte, leased to NS; and monthly payments of
approximately $700 for the lease of miscellaneous other
parcels of property (this miscellaneous rental income has
modestly increased to approximately $15,000 annually for
1996). Even at its past abysmally low level, the rental
received from NS for its use of this line constituted most
of NCRR's total income.
In this circumstance, the ability to receive a
minimally adequate rental now, in the form of interim
compensation, will be critical to NCRR's ability to finance
this proceeding, particularly in view of Norfolk Southern's
substantial financial resources. Absent such interim
compensation, NCRR would find itself in the predicament of
borrowing to finance the proceeding and thereby incurring
substantial interest expense if financing is even available
on acceptable terms. Given the length of time often
consumed by trackage compensation proceedings, interim
relief is a matter of major importance.3/
3/ For example, in F.D. No. 22218, Atchison, Topeka &
Santa Fe Ry. -- Operating Agreement -- Southern Pacific
Transportation Co., more than two years elapsed between the
landlord's May 15, 1991 Petition to Reopen and the
Commission's July 8, 1993 order approving a joint
stipulation of the parties. In F.D. No. 31281, Arkansas
and Missouri R.R. v. Missouri Pacific R.R., more than four
years elapsed between the landlord's May 5, 1988 Complaint
and the Commission's June 5, 1992 decision fixing a reasonable
rental. See Arkansas & Missouri, 8 I.C.C.2d 567 (1992).
It is also important to note that among the people
ultimately injured by the present situation are the
taxpayers of North Carolina. As previously noted, 75% of
the stock of NCRR is owned by the State of North Carolina.
With respect to the amount of the interim
compensation, it is clear that the rent provided in the
now-expired century-old leases cannot be an appropriate
measure. All parties agree that the level of fixed
compensation set forth in those agreements -- approximately
$600,000 -- is wholly inadequate. This is not surprising,
given the fact that much of this rental was agreed to almost
100 years ago and has not been changed since.4/ Thus, NS
itself agreed in the Conditional Lease Extension Agreement
(which was rejected as inadequate by NCRR's private
shareholders) to a base annual rental of $8 million on a
"net" basis -- over 13 times the past amount.
4/ The 1895 agreement contained no provision for any
adjustment whatsoever for inflation.
NCRR submits that, in the circumstances of this case,
the most appropriate measure of interim compensation is the
amount that NS itself voluntarily paid for the seven months
prior to the district court's decision invalidating the NCRR
shareholders vote -- $680,700 per month net of all
maintenance, capital improvements, taxes and assessments on
the lines. The Board should also require NS to continue to
maintain the assets, make capital improvements, and pay all
taxes and assessments.
The situation here is similar to that in F.D. No.
32467, Conrail-Amtrak (slip op. served Jul. 25, 1995). In
that case, in setting interim compensation for Amtrak's use
of Conrail's lines, the Commission decided that it is
reasonable to accept the compensation rate developed from
the tenant's own formula. See id. at 10. The Commission
explained:
Based on the parties' submissions, it is clear that Conrail is
significantly underpaid..... An interim payment order at the rate
derived from Amtrak's "new" SFGT formula will provide Conrail with
some reflief while the Commission takes the time necessary to arrive
at a thoughtful decision on the merits.
Id.
Similarly, in Missouri-Kansas-Texas R.R. v. Kansas
City Terminal Ry., 104 I.C.C. 203, 204-05 (1925), upheld on
other grounds, United States v. ICC, 71 F.2d 336 (D.C. Cir.
1934), aff'd, 294 U.S. 50 (1935), the Commission was asked
to set reasonable terms for the use of a terminal facility.
The railroad instituting the proceeding had elected not to
adopt a previous operating agreement with the landlord, just
as the requisite approval of the Lease Extension Agreement
by NCRR's shareholders is here lacking. In issuing an
emergency service order, the Commission set interim
compensation at the level set forth in the operating
agreement, pending final determination of reasonable terms
for the use of the facilities.
In this case, it is grossly unfair for NS to continue
to use NCRR's line while paying nothing whatsoever for that
privilege. The Board should promptly afford NCRR the
necessary relief by ordering the payment of interim
compensation during the pendency of this proceeding.
RELIEF REQUESTED
On the basis of the foregoing, NCRR respectfully
requests that the Board set interim compensation for NS's
continued operations over NCRR's line at no less than
$680,700 per month net of all maintenance, capital
improvements, taxes and assessments on the line retroactive
to the rental due for August 1996.
Respectfully submitted,
Respectfully submitted,
/s/ Betty Jo Christian
Scott M. Saylor Betty Jo Christian
General Counsel Pantelis Michalopoulos
North Carolina Railroad STEPTOE & JOHNSON
Company 1330 Connecticut Avenue, NW
3200 Atlantic Avenue Washington, DC 20036
Suite 110 (202) 429-3000
Raleigh, North Carolina 27604
Attorneys for North Carolina
Railroad Company
Dated: September 23, 1996
