Filed: Sep. 25, 2012
Latest Update: Feb. 12, 2020
Summary: Agreement.preemption, district court required to remand state-law claims);2, MBR argues on appeal that Pan Am waived its right to enforce, Rule 138(e) because it had been aware for years that MBR routinely, pushed its trains through highway crossings without an employee, stationed at the crossing.
United States Court of Appeals
For the First Circuit
No. 12-1031
MILFORD-BENNINGTON RAILROAD CO.,INC.,
Plaintiff, Appellant,
PETER LEISHMAN,
Plaintiff,
v.
PAN AM RAILWAYS, INC.; BOSTON AND MAINE CORPORATION;
SPRINGFIELD TERMINAL RAILWAY COMPANY,
Defendants, Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW HAMPSHIRE
[Hon. Paul J. Barbadoro, U.S. District Judge]
Before
Howard, Ripple* and Selya
Circuit Judges.
Adam Francois Watkins, with whom Watkins, Bradley & Chen LLP,
Craig S. Donais and Donais Law Offices, PLLC were on brief, for
appellant.
Michael J. Connolly, with whom Kelley A. Jordan-Price and
Hinckley, Allen & Snyder LLP were on brief, for appellees.
*
Of the Seventh Circuit, sitting by designation.
September 25, 2012
HOWARD, Circuit Judge. Milford-Bennington Railroad
Company, Inc. ("MBR") appeals an award of summary judgment to Pan
Am Railways, Inc.; Boston and Maine Corporation; and Springfield
Terminal Railway Company (collectively, "Pan Am") in a dispute
arising from Pan Am's actions under a contract to provide MBR with
access to Pan Am's railroad tracks. The district court held that
Pan Am did not breach its duty of good faith and fair dealing when
it exercised its contractual right to exclude an MBR employee from
its trackage for violating a safety rule. We affirm.
I. Background
Plaintiff-Appellant MBR hauled stone by rail for its only
customer, Granite State Concrete. Because MBR does not own the
necessary trackage, it entered into a contract with Pan Am that
permits MBR to operate trains on Pan Am's trackage (the
"Agreement"). The Agreement requires MBR to follow Pan Am's rules,
which include the Operating Rules of the Northeast Operating Rules
Advisory Committee ("NORAC"). If Pan Am determines that an MBR
employee has violated its rules, it "shall have the right to
exclude [the employee] from the Trackage."
On October 22, 2009, MBR employees Peter Leishman and
David Raymond were operating a train on Pan Am's trackage. At the
leading end of the train, Leishman operated a control car, which is
a caboose modified with safety features including a horn, an
emergency brake, and lights. Behind the control car were ten
-3-
hopper cars filled with crushed stone. At the trailing end,
Raymond operated a locomotive, which pushed the train from behind.
As the train approached a highway crossing, a tractor trailer truck
crossed the tracks. Leishman activated the emergency brake, but
the train collided with the truck, derailing the control car and
one of the hopper cars.
In response to the accident, Pan Am sent Leishman a
letter notifying him of an investigative hearing scheduled for
November 10, 2009. The letter was dated November 4, and Leishman
states that he received it on November 6. Leishman requested a
postponement due to his injuries from the collision and so that his
counsel could attend the hearing, but Pan Am went forward as
scheduled without Leishman or his counsel present. Because no
employee of MBR was stationed at the crossing at the time of the
accident, Pan Am determined that Leishman had violated NORAC
Rule 138(e), "Trains Operating from Other Than The Leading End at
a Highway Crossing," which provides:
Trains being operated from other than the
leading end must not enter a highway crossing
at grade until on-ground warning is provided
by a crew member or other qualified employee,
except when it is visually determined that:
. . . .
2. A designated and qualified employee is
stationed at the crossing and has the ability
to communicate with trains . . . .
Pan Am did not immediately disclose its determination to Leishman.
-4-
When Leishman attempted to return to work on
March 17, 2010, a Pan Am dispatcher refused him access to the
tracks due to "company policy." Leishman contacted Pan Am’s
general counsel Robert Burns, who asked Leishman for a meeting to
discuss signing a new trackage-rights agreement. Leishman and
Burns met on March 19, and on April 8, Burns proposed the terms of
a new agreement. The next day, Leishman rejected the proposal.
That same day, Pan Am sent Leishman a letter stating that, at the
time of the accident, he was "not properly stationed for the
backward move through the crossing" and that "it would be the
safest course to prevent you personally from operating on [Pan Am]
property in the future pursuant to [the Agreement]."
On April 14, Thomas Brugman of the Surface Transportation
Board emailed Pan Am to express his concerns regarding the effect
of Pan Am's decision on Granite State Concrete and the potential
appearance that Pan Am had not given sufficient process to Leishman
and MBR. Pan Am then scheduled a supplemental investigative
hearing, which Leishman attended. Pan Am again concluded that
Leishman had violated its rules.
MBR and Leishman filed a petition in June 2010 against
Pan Am in New Hampshire Superior Court. The petition did not lay
out specific causes of action, but it sought to enjoin Pan Am from
excluding Leishman from its trackage, as well as compensatory
damages "in excess of $50,000." In July 2010, Pan Am removed the
-5-
case to the United States District Court for the District of New
Hampshire on the ground that the ICC Termination Act of 1995
("ICCTA"), in particular 49 U.S.C. § 10501(b), completely preempted
MBR and Leishman’s claims. The district court stayed the case when
the parties agreed to hold a third investigative hearing. At that
hearing, Leishman asserted that he had complied with Rule 138(e)
and that Pan Am's interpretation of the rule was incorrect. Once
more, Pan Am upheld its original decision.
After the third hearing but before the district court
made any substantive rulings, Leishman and MBR filed an amended
complaint that listed four causes of action, all described as
breaches of the Agreement. Count One alleged that Pan Am breached
its covenant of good faith and fair dealing in excluding Leishman
because Pan Am had not objected to MBR's practices in the past, and
MBR arguably had not violated Rule 138(e). Count Two alleged that
Pan Am's hearing process was improper. Count Three claimed that
Pan Am unreasonably excluded Leishman because the accident was
unavoidable and because Pan Am had filed a report with the Federal
Railroad Administration stating that the truck driver was at fault.
Count Four claimed that Pan Am misinterpreted Rule 138(e). Pan Am
moved to dismiss the amended complaint on the grounds that the
ICCTA preempted MBR and Leishman's claims, Leishman was not a party
to the Agreement, and Count Four of the amended complaint
duplicated Count One. The district court held that the ICCTA did
-6-
not preempt MBR and Leishman's claims, but it dismissed Leishman
from the action and dismissed Count Four. The district court then
held a hearing at which it determined that Leishman had violated
Rule 138(e) and that Leishman's interpretation of the rule was "not
a plausible one at all."
After the hearing, the only remaining issue before the
district court was whether Pan Am's decision to exclude Leishman
violated the duty of good faith and fair dealing implicit in the
Agreement. Pan Am moved for summary judgment, arguing that because
the Agreement gives it the express right to exclude an employee of
MBR for violating its rules, the duty of good faith and fair
dealing could not prohibit it from excluding Leishman. The
district court granted Pan Am's motion, and MBR timely appealed.
II. Analysis
A. Jurisdiction
In every case, we are required to satisfy ourselves of
jurisdiction. García-Velázquez v. Frito Lay Snacks Caribbean,
358 F.3d 6, 8 (1st Cir. 2004). Here, the record suggests a
possible defect in the district court's jurisdiction. Although MBR
and Leishman's state-court petition raised no issues of federal
law, Pan Am removed this action based on federal-question
jurisdiction -- specifically, complete preemption of MBR and
Leishman's claims by the ICCTA. See Beneficial Nat'l Bank v.
Anderson,
539 U.S. 1, 8 (2003) ("[A] state claim may be removed to
-7-
federal court . . . when a federal statute wholly displaces the
state-law cause of action through complete pre-emption."). When
the district court held that the ICCTA did not completely preempt
MBR and Leishman's claims, the basis for federal jurisdiction
became subject to question. See Fayard v. Ne. Vehicle Servs., LLC,
533 F.3d 42, 45, 49 (1st Cir. 2008) (in the absence of complete
preemption, district court required to remand state-law claims);
See also Martin H. Redish, 16 Moore's Federal Practice - Civil §
106.66[1] (3d ed. Supp. 2012) (listing cases from seven courts of
appeals holding that a district court may not exercise supplemental
jurisdiction over state-law claims without original jurisdiction
over the action).
On appeal, the parties claim that the district court also
had diversity jurisdiction under 28 U.S.C. § 1332, which grants the
district courts original jurisdiction over civil actions between
citizens of different states in which the amount in controversy
exceeds $75,000. Here, the plaintiffs and defendants are citizens
of different states,1 but the original petition filed in state
court alleged damages "in excess of $50,000."
Thus, it is not facially apparent whether the plaintiffs satisfied
1
Leishman is a citizen of New Hampshire. MBR is a New
Hampshire corporation with a principal place of business in New
Hampshire. Pan Am Railways, Inc. and Boston and Maine Corporation
are Delaware corporations with principal places of business in
Massachusetts. Springfield Terminal Railway Company is a Vermont
corporation with a principal place of business in Massachusetts.
-8-
the amount-in-controversy requirement. Because the party invoking
federal jurisdiction bears the burden of demonstrating that the
court has subject-matter jurisdiction over the case, Amoche v.
Guarantee Trust Life Ins. Co., 556 F.3d 41, 48 (1st Cir. 2009), Pan
Am must show that the amount in controversy exceeds $75,000.
Although we have not decided how heavy a burden the removing party
must bear in this precise situation, we have decided that a party
removing a case under the Class Action Fairness Act of 2005, 28
U.S.C. §§ 1332(d), 1453, must show a "reasonable probability" that
the jurisdictional threshold is satisfied.
Amoche, 556 F.3d at 48-
49.
Whatever the appropriate burden, Pan Am has satisfied it.
On appeal, counsel for MBR told this court that after the district
court ruled that MBR's claims were not preempted, the court held a
conference call during which the parties agreed that MBR's claims
satisfied the amount-in-controversy requirement. Moreover, shortly
after removal, MBR filed a motion for a preliminary injunction
stating that "[t]he current economic impact to [MBR] and the State
of New Hampshire are, at present, approximately $300,000." Seeing
nothing in the record that belies the parties' agreement regarding
the amount in controversy, we conclude that the district court had
jurisdiction over this action.
-9-
B. Good Faith
The only issue before us is whether Pan Am's decision to
exclude Leishman from its trackage violated the duty of good faith
and fair dealing implicit in the Agreement.2 The district court
granted summary judgment to Pan Am, holding that the Agreement
"plainly gives it the right to act as it did, regardless of its
motive for doing so. Under the circumstances, MBR cannot rely on
the duty of good faith and fair dealing to restore a right that it
bargained away by agreeing to the [Agreement]." Milford-Bennington
R.R. Co. v. Pan Am Rys., Inc., No. 10-cv-00264-PB, 2011 WL 6300923,
at *6 (D.N.H. Dec. 16, 2011). We review the district court's grant
of summary judgment de novo. Hunt v. Golden Rule Ins. Co.,
638 F.3d 83, 86 (1st Cir. 2011).
New Hampshire law, which governs the Agreement, requires
that parties to an agreement "act in good faith and fairly with one
another." Livingston v. 18 Mile Point Drive, Ltd., 972 A.2d 1001,
1005 (N.H. 2009). The good-faith obligation limits the parties'
discretion in contractual performance,
id. at 1006, by "excluding
behavior inconsistent with common standards of decency, fairness,
and reasonableness, and with the parties' agreed-upon common
2
MBR argues on appeal that Pan Am waived its right to enforce
Rule 138(e) because it had been aware for years that MBR routinely
pushed its trains through highway crossings without an employee
stationed at the crossing. Because MBR failed to make this
argument to the district court in its opposition to Pan Am's motion
for summary judgment, the argument is waived. See Sony BMG Music
Entm't v. Tenenbaum, 660 F.3d 487, 496 (1st Cir. 2011).
-10-
purposes and justified expectations." Centronics Corp. v. Genicom
Corp., 562 A.2d 187, 191 (N.H. 1989) (Souter, J.). Surveying its
own cases, the New Hampshire Supreme Court has explained that
under an agreement that appears by word or
silence to invest one party with a degree of
discretion in performance sufficient to
deprive another party of a substantial
proportion of the agreement's value, the
parties' intent to be bound by an enforceable
contract raises an implied obligation of good
faith to observe reasonable limits in
exercising that discretion, consistent with
the parties' purpose or purposes in
contracting.
Id. at 193. Put differently, "the concept of good faith in
performance addresses the particular problem raised by a promise
subject to such a degree of discretion that its practical benefit
could seemingly be withheld."
Id.
In Centronics, the New Hampshire Supreme Court listed
four questions that must be answered in the affirmative to state a
claim for breach of the duty of good faith and fair dealing.
Id.
MBR and Pan Am dispute the answers to two of these four questions:
1. Does the agreement ostensibly allow to or
confer upon the defendant a degree of
discretion in performance tantamount to a
power to deprive the plaintiff of a
substantial proportion of the agreement's
value?
. . . .
3. Assuming an intent to be bound, has the
defendant's exercise of discretion exceeded
the limits of reasonableness?
-11-
Id.3
As to the first question, MBR points out that the
Agreement gives Pan Am the "right to exclude from the Trackage any
employee of MBR" who violates Pan Am's rules, without any
limitation on the length of the exclusion and without regard to the
severity of the violation. MBR has only two employees, both of
whom are necessary to operate MBR's trains. As a result, MBR
argues, Pan Am can effectively deprive MBR of the Agreement's value
by excluding an MBR employee for life, even for trivial violations
of Pan Am's rules.
Pan Am responds that the Agreement does not give MBR the
right to have a particular employee operate a train after violating
Pan Am's rules, so Pan Am does not deprive MBR of the Agreement's
value by excluding an MBR employee from Pan Am's trackage. When it
executed the Agreement, MBR was aware of Pan Am's right to exclude
its employees, and it could have prepared for the scenario in which
Pan Am exercised that right.
We need not decide whether Pan Am's right to exclude
MBR's employees confers "a degree of discretion in performance
tantamount to a power to deprive the plaintiff of a substantial
proportion of the agreement's value," id., 562 A.2d at 193, because
3
The other two questions are whether the parties intended to
create an enforceable contract and whether the defendant's actions
caused the plaintiff's damages. Centronics, 562 A.2d at 193-94.
The parties agree that the answer to both questions is yes.
-12-
we are satisfied that even if Pan Am had such discretion when
deciding whether to exclude MBR's employees, its exercise of that
discretion was reasonable, see id. ("[H]as the defendant's exercise
of discretion exceeded the limits of reasonableness?").
Following three hearings by Pan Am and one of its own,
the district court ruled that Leishman violated NORAC Rule 138(e)
by failing to station an employee at the crossing while MBR's train
crossed the highway. Moreover, Leishman's violation was followed
by the very type of accident the rule presumably was intended to
prevent: a collision between a train and a vehicle at an unguarded
crossing. MBR has chosen not to appeal this ruling, and we will
not revisit it here. In light of Leishman's violation of a safety
rule and the accident that followed, we conclude that Pan Am's
decision to exclude Leishman from its trackage did not "exceed[]
the limits of reasonableness." Id. at 193.
Although Pan Am had an objective basis for its decision,
MBR urges us to look to Pan Am's subjective intent, which it claims
was to force MBR into an unfavorable contract or shut down MBR's
operations. MBR cites a number of cases in which the court warned
parties against violating the duty of good faith by acting on
subterfuge or illicit motives.4 Most of these cases follow a
4
These cases include Olbres v. Hampton Coop. Bank, 698 A.2d
1239, 1243 (N.H. 1997); Bayview Condominium Ass'n v. Ohanian,
No. 08-C-0129,
2008 WL 7467082 (N.H. Super. Ct. Oct. 24, 2008);
McAdams v. Massachusetts Mutual Life Insurance Co.,
391 F.3d 287,
302 (1st Cir. 2004) (applying Massachusetts law); Original Great
-13-
common pattern: a contract gives a party the right to take action
if a certain condition is met, the party allegedly determines in
bad faith that the condition is met, and the party takes action
accordingly. E.g., Olbres v. Hampton Coop. Bank, 698 A.2d 1239,
1243 (N.H. 1997) (bank's right to set off customer's deposits
against its liabilities). This case does not conform to that
pattern, however, because Pan Am's decision that Leishman violated
Rule 138(e) is beyond dispute. Pan Am had an unassailably valid
reason to exclude Leishman, so its alleged ulterior motives are
irrelevant. See Tuf Racing Prods., Inc. v. Am. Suzuki Motor Corp.,
223 F.3d 585, 589 (7th Cir. 2000) (Posner, C.J.) ("If a party has
a legal right to terminate the contract . . . its motive for
exercising that right is irrelevant.").
Leishman and MBR's actions after the accident reinforce
our conclusion. At Pan Am's third hearing and before the district
court, Leishman and MBR argued that Leishman had not violated
Rule 138(e), despite the rule's clear requirement that MBR station
an employee at the crossing. Although MBR chose not to appeal the
district court's ruling that Leishman violated Rule 138(e), it
continues to refer in its appeal brief to the "purported
violation," which it describes as trivial. We would be hard-
American Chocolate Chip Cookie Co. v. River Valley Cookies, Ltd.,
970 F.2d 273, 280 (7th Cir. 1992) (Posner, J.); and Carlson Machine
Tools, Inc. v. American Tool, Inc.,
678 F.2d 1253, 1262 (5th Cir.
1982).
-14-
pressed to say that Pan Am's decision to exclude Leishman is
"inconsistent with common standards of decency, fairness, and
reasonableness," Centronics, 562 A.2d at 191, when MBR has not
challenged the finding of a violation but, nevertheless, neither it
nor Leishman accepts responsibility for the violation despite a
spate of adverse rulings over the course of more than two years of
litigation. Therefore, even if Pan Am was bound by a duty of good
faith and fair dealing when exercising its right to exclude
Leishman, Pan Am has not breached that duty.
III. Conclusion
We affirm the district court's judgment.
-15-
