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Paulsboro Refining Company, LLC v. Sms Rail Service

December 19, 2012


The opinion of the court was delivered by: Simandle, Chief Judge:



Defendant SMS Rail Service provides railroad services for Plaintiff Paulsboro Refining Company on 5.8 miles of railroad track that Plaintiff owns. Plaintiff wishes to terminate Defendant's contract, an action which requires approval from the federal Surface Transportation Board ("STB") so that Defendant can "abandon" the rail line. The present litigation involves a dispute regarding which party is responsible for paying the costs of seeking this approval from the STB. Plaintiff filed a petition with the STB seeking approval to terminate Defendant's service. Plaintiff then filed this contract action in the Superior Court of New Jersey, seeking costs, damages, and declaratory relief establishing Defendant's responsibility for the costs of obtaining the STB's approval. Defendant removed the action to this Court.

The action comes before the Court on three motions: (1) Defendant's Motion to Refer Federal Issues to the STB And for a Stay Pending the STB's Decision [Docket Item 3]; (2) Plaintiff's Motion to Remand [Docket Item 10]; and (3) Defendant's Motion for Leave to File Sur-Reply [Docket Item 16]*fn1 . The Court heard Oral Argument on December 17, 2012. The principal issue to be decided is whether the Court has jurisdiction to adjudicate Plaintiff's claim that the Defendant railroad has breached the parties' rail services agreement. Because this action only involves a contract dispute between non-diverse parties regarding which party must pay the costs of obtaining STB approval, as to which no federal question is presented, the Court lacks jurisdiction. Plaintiff's Motion to Remand will be granted. Defendant's Motion to Refer and to Stay will be dismissed as moot.


A. The State Court Complaint

In April of 2012, Plaintiff Paulsboro Refining Company LLC*fn2 ("PRC") filed a Complaint in New Jersey state court, specifically the Gloucester County Superior Court, against Defendant SMS Rail Service, Inc. ("SMS"). PRC's office is located in Paulsboro, New Jersey, and SMS's principal place of business is in Bridgeport, New Jersey. (Compl. ¶¶ 1-2.) The Complaint sought declaratory relief and damages under state law for SMS's alleged breach of an agreement to service and maintain railroad tracks owned by PRC. (Compl. ¶ 3.)

PRC currently owns a petroleum refinery occupying 970 acres in Greenwich Township, Gloucester County. (Compl. ¶ 4.) The refinery contains approximately 5.8 miles of trackage. In 2000, PRC entered into a "Rail Line Service Agreement" (the "Service Agreement") with SMS. (Compl. ¶ 6.) Pursuant to the Service Agreement, SMS agreed to maintain and service approximately 5.8 miles of private rail line, which PRC owned and used in its refinery operations. (Compl. ¶ 7.) In 2010, PRC and SMS amended the Service Agreement, creating the "Second Amendment to Rail Service Agreement" ("Second Amendment").*fn3 (Compl. ¶ 8.) The Second Amendment allegedly permits PRC to terminate the Service Agreement by providing SMS with 90 days written notice of its intention to terminate. (Compl. ¶ 9.) Section 10 of the Service Agreement states that Defendant agrees, at the expiration or termination of the contract, to "yield up" the rail line in clean, neat, orderly, repaired condition and to remove its railcars and equipment. (Compl. ¶ 10.)

On September 22, 2011, PRC notified SMS in writing that PRC was terminating the Service Agreement and planning to hire another rail service provider. (Compl. ¶ 11.) On October 27, 2011, PRC's Senior Vice Present wrote to SMS's President, referred to the September 22, 2011 termination notice, confirmed that the Service Agreement would terminate on December 21, 2011, and reminded SMS of its obligation to yield the rail line. (Compl. 12.)

On November 2, 2011, SMS's counsel responded to the September 22, 2011 letter and stated that SMS could not cease providing rail service until the Surface Transportation Board ("STB") authorized abandonment of the rail line, that SMS had no obligation to apply to the STB for authorization to abandon the line, and that STB would not do so. (Compl. ¶ 13.) The letter stated that the Service Agreement "is silent as to who is to seek the abandonment authorization if the [Service] Agreement is to be terminated, and it may well be that the 90-day cancellation notice can be given only after the abandonment authorization has been received from the [STB]." (Compl. Ex. E; SMS's November 2, 2011 letter to PRC at 1.) SMS further explained that anyone can seek a third-party or adverse abandonment application and, if PRC wanted to have SMS cease operations, it could file such an application with the STB. In addition, SMS emphasized that, absent STB approval, only SMS can operate on the tracks.

Plaintiff argues that, assuming STB authorization is required before SMS can cease operations, SMS is contractually obligated to seek such authority from the STB. (Compl. ¶ 14.) Section 6 of the Service Agreement states that SMS "shall be responsible for obtaining and keeping in effect all licenses, permits, and approvals required by federal or state law or regulation relating to the operation, rail servicing and maintenance by [SMS] of the Rail Line." (Compl. ¶ 15.) In addition, Section 9 of the Service Agreement states that SMS covenants "at [SMS's] sole cost and expense, promptly to comply with all laws and ordinances and notices, orders, rules, regulations and requirements of all federal, state and municipal governments. . . ." (Compl. ¶ 16.)

Plaintiff alleges that the Service Agreement terminated on December 21, 2011, 90 days after PRC sent the first termination notice to SMS. (Compl. 17.) SMS has not yielded the rail line, removed its equipment, or sought STB's authorization to abandon the rail line. (Compl. ¶ 18.) Plaintiff therefore argues that SMS is in default of its obligations under the Service Agreement. (Compl. ¶ 19.)

Because SMS refused to seek the STB's authorization to abandon the rail line, PRC sought authorization by filing a Petition for Adverse Discontinuance of Service Exemption before the STB ("First Petition") in January of 2012. (Compl. ¶ 21.) SMS opposed the First Petition. The STB dismissed the First Petition on procedural grounds in March of 2012. (Compl. ¶ 22.) PRC then filed a Petition for Waivers and Exemptions ("Second Petition") before the STB, once again seeking a streamlined process in which the STB would determine whether to approve abandonment of the rail line. (Compl. ¶ 23.) The STB granted the Petition for Waivers and Exemptions in July, 2012, according to counsel.*fn4

Section 14 of the Service Agreement mandates that SMS "shall reimburse [PRC] for any reasonable sums paid or costs incurred by [PRC] in curing such default. . . ." (Compl. ¶ 24.) And Section 16 mandates that SMS must surrender the rail line to PRC without cost or charge to PRC. (Compl. ¶ 27.) PRC has allegedly incurred significant costs in its efforts to cure SMS's default, terminate SMS's possession of the rail line, and enforce its rights under the Service Agreement. (Compl. ¶ 25.) In addition, PRC has allegedly incurred costs from SMS's failure to yield the rail line and the resulting delay in takeover by a successor rail service provider. (Compl. ¶ 26.)

PRC pleads three counts for relief. In Count I, PRC requests a declaratory judgment declaring, inter alia, that (1) pursuant to the Service Agreement, SMS was obligated to take all necessary steps to yield up the rail line, including obtaining the STB's authorization; (2) SMS's refusal to seek the STB's authorization was a default under, and breach of, the Service Agreement; and (3) SMS must pay the damages and costs, along with attorney's fees and interest, that SMS incurred as a result of the default.

Count II alleges breach of contract and seeks compensatory damages, interest, and costs of suit and attorney's fees. Count III alleges breach of the implied covenant of good faith and fair dealing.

B. Defendant's Notice of Removal

Defendant removed the action to this Court [Docket Item 1] because it argued that this Court has federal question jurisdiction pursuant to 28 U.S.C. § 1331. SMS emphasized that it cannot abandon the rail line absent STB's authorization and that the abandonment determination is committed to the sole and exclusive jurisdiction of the STB. If the Court refers a question to the STB, then the Court would have exclusive jurisdiction to enforce the STB's decision, pursuant to 28 U.S.C. § ...

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