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  • WisBar News
    September 20, 2011

    Federal appeals court settles contract dispute between Wisconsin railroad operators

    A railroad company sold a spur line but reserved an easement to exclusively serve an existing customer, which had a plastics plant along the spur line. Despite the railroad company’s “trade usage” argument, that easement expired when the plant changed hands.

    Federal appeals court settles contract dispute   between Wisconsin railroad operators Sept. 20, 2011 – A railroad company that sold its spur line but reserved a right to serve an existing customer should have reserved the right to serve the customer's facility instead, if that was the intention.

    That’s what a panel for the Seventh Circuit Court of Appeals concluded in Dakota, Minnesota & Eastern Railroad Corp v. Wisconsin & Southern Railroad Corp., No. 10-3177 (Sept. 20, 2011).

    Dakota, Minnesota & Eastern (DM&E) owned rail lines in and around Janesville, including a 200-foot spur line that connected the main railroad with a plant owned by Freedom Plastics, Inc. Freedom Plastics shipped plastic products weekly and was DM&E’s biggest Janesville customer.

    DM&E sold its Janesville lines, including the spur line, to Wisconsin & Southern (W&S), but reserved the right by contract to serve Freedom Plastics and another existing customer. But when Freedom Plastics sold off its assets, the North American Pipe Corporation purchased the plant served by the spur line.

    Asserting that the change in ownership voided DM&E’s exclusive easement to serve Freedom Plastics, W&S contracted with North American Pipe to ship products from the plant. DM&E sued, asserting that a change of ownership did not void its right to serve the facility on the spur line.

    The U.S. District Court for the Western District of Wisconsin granted summary judgment in favor of W&S, and the appeals panel affirmed in an opinion written by Judge Richard Posner.

    Applying Wisconsin substantive law, the panel rejected DM&E’s argument that referencing a customer’s name in a railroad contract denotes the facility the customer owns. In other words, DM&E argued the term “existing customer” or “current industry” has a particular “trade usage” in the railroad industry.

    “But the only evidence it presented is that a railroad worker continues to refer to the factory as Freedom Plastics,” Judge Posner noted. “That is no evidence at all. For all we know, the worker doesn’t know the factory has a new owner.”

    Although it would make sense for DM&E to retain rights to serve the facility instead, the panel explained that its “failure to do so would indicate to Wisconsin & Southern that DM&E cared about the specific customer, and not about the plant owned by Freedom Plastics should ownership of the plant change.”

    The appeals panel also rejected DM&E’s argument that W&S was trespassing because DM&E owned the spur line tracks, even though it sold the land underneath.

    “Dividing ownership of the land and the tracks is so weird that there would have to be compelling evidence, textual or otherwise, to justify the interpretation urged by DM&E,” Judge Posner wrote.

    The quitclaim deed that conveyed property explicitly stated that the rails go with the land, the panel explained, and merely reserved a right of way to DM&E. “We have just held that the easement expired when Freedom Plastics decamped,” wrote Judge Posner.

    By Joe Forward, Legal Writer, State Bar of Wisconsin

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