United States District Court, S.D. New York
OPINION AND ORDER GRANTING PLAINTIFF'S MOTION TO
K. HELLERSTEIN, U.S.D.J.
Midwest Railcar Corporation's ("Midwest")
amended complaint, and Defendants Everest Railcar Services,
Inc.'s and Steven J. Hendricks' (together,
"Everest") counterclaims, allege contradictory
positions regarding a series of railcar leases. Midwest has
moved to dismiss Everest's counterclaims. See
Dkt. No. 36. In order to rule on Midwest's motion, I must
consider the merits of both the complaint and the
counterclaims. In the context of this overall review, I first
hold that Midwest has adequately stated a breach of contract
claim for Everest's alleged repudiation of its prior
exercise of an irrevocable option to either renew the leases
or purchase the railcars. I dismiss, however, for lack of
legal and factual sufficiency, Everest's counterclaims
for breach of contract, conversion, unfair competition,
tortious interference with contract, and tortious
interference with prospective business relationship.
The First Amended Complaint
First Amended Complaint ("FAC") complains that
Everest breached a series of lease agreements for
approximately 200 railcars and that Defendant Hendricks,
Everest's president, breached his personal guaranty of
Everest's performance. In 2011, Everest leased the
railcars from Banc of America Leasing & Capital, LLC
("Bof A Leasing") under a Master Lease Agreement
and six schedules (the "Leases"), and Hendricks
personally guaranteed Everest's obligations under the
Leases. Bof A Leasing later assigned its rights and
obligations under the Leases to Midwest. The Leases were to
expire in accordance with their terms on six dates between
February 13, 2016 and July 4, 2016.
Leases gave Everest an option, exercisable by irrevocable
notice 360 days (but not less than 180 days) before the lease
expiration date, either to (a) extend the term of the lease
for a renewal period to be agreed on by the parties and at
fair market value "as determined by the Lessor, "
or (b) to purchase the railcars at fair market value "as
determined by the Lessor." Midwest alleges that Everest
timely exercised this option via written letter on May 28,
2015, "irrevocably electing to either renew the Leases
or purchase the railcars." FAC ¶ 20.
8, 2015, Midwest contacted Everest via telephone and
responded that the fair market value at the time was in the
"mid-$500s per railcar per month" for rentals, and
"between $70, 000.00 and $80, 000.00 per railcar"
for purchase. Id. ¶ 21. On December 1, 2015,
Midwest asked Everest via letter whether it intended to
purchase the railcars or renew the lease, to which Everest
responded by purporting to terminate or cancel its prior
irrevocable election. Id. ¶¶ 23-24. On
December 18, 2015, Midwest declared Everest in default, and
on January 5, 2016, Everest stated its intention to return
the railcars at the end of each lease term. Id.
alleges that it refrained from marketing the railcars to
other parties after Everest's May 28 exercise of the
option, and that the market for railcars significantly
deteriorated between that time and Everest's repudiation
on December 1, 2015. Midwest seeks recovery under five claims
for relief: breach of the Leases by Everest for repudiating
its irrevocable election to purchase or renew the lease the
railcars, breach of Hendricks' guaranty agreement,
promissory estoppel, failure to negotiate in good faith, and
negligent misrepresentation. Midwest alleges that it suffered
damages by the deteriorated price of railcars during the
period between Everest's exercise of the option and its
purported cancellation of that exercise. As a remedy, Midwest
seeks specific performance and unspecified money damages.
answer denies liability and alleges counterclaims. Everest
alleges that its May 28, 2015 letter was not an invocation of
an irrevocable option, but merely indicated "a
willingness to either renew the Lease or to purchase the
railcars upon receiving specific terms of the renewal or the
purchase." Counterclaims ¶ 103. Everest agrees that
the parties spoke on July 8, 2015, but alleges that the
Midwest representative informed Everest that he would have to
speak to Midwest's CEO "before they could discuss
terms of any renewal or purchase of the railcars."
Everest further alleges that Midwest never called back with
more specifics. Id. ¶ 104. When Midwest failed
to respond, Everest, by emails of November 30 and December 1,
2015, advised Midwest that it would not renew the lease or
purchase the railcars, but would instead return the railcars
upon expiration of each lease. Id. ¶ 105.
Midwest's December 1 letter, which seemingly ignored
Everest's emails offering to the return the railcars and
instead inquired as to whether Everest intended to lease or
purchase, the parties engaged in further discussion over
potential lease or purchase terms, but without agreement.
Everest alleges that during these discussions, it informed
Midwest that similar railcars had been marketed to Everest
for $275 per month on a full service basis, under which the
lessor is responsible for maintenance and repairs. Everest
further alleges that its leases with Midwest are net leases,
under which the lessee is responsible for such upkeep, and
that the difference between the fair market value of a full
service lease and a net lease is approximately $75 per car.
Id. ¶¶ 108-112. On December 4, 2015,
however, Midwest informed Everest that it was interested in a
five-year renewal term at a rental price in the "high
300s" per railcar. Id. ¶ 113. Negotiations
continued thereafter but, Everest alleges, "Midwest
continued to offer alleged fair market value purchase and
renewal rates to Everest that were well-above and beyond the
actual fair market value renewal or purchase rates for the
railcars at issue." Id. ¶ 114.
concluded that Midwest was not negotiating in good faith,
Everest then offered to return the railcars in accordance
with the lease terms. Id. ¶ 116. In response,
on December 18, 2015, Midwest sent Everest a notice of
default via written letter, which charged Everest with
refusing "to consummate a renewal or purchase, "
stated that Everest's offer to return the railcars
constituted repudiation of its irrevocable exercise of the
option, and gave Everest thirty days to cure its default,
either by executing renewal leases enclosed with the letter,
or purchasing at $72, 500 per railcar. Midwest also asserted
that Everest's attempt to return the railcars was itself
a breach of the parties' agreement because Section 13 of
the Master Lease Agreement requires Everest to provide
Midwest with at least 180 days written notice of its
intention to return the railcars. Counterclaims, Ex. K.
responded on January 5, 2016, again offering to return the
railcars and stating that its offer to return the railcars
constituted cure. Counterclaims, Ex. L. Midwest responded by
instructing Everest to store the railcars for 180 days and to
then return the railcars to a specified location: Transco
Railway Products in Oelwein, Iowa. Counterclaims ¶ 121.
Everest alleges, however, that the Leases require the lessee
to return the railcars to a "mutually acceptable
interchange point." Id. ¶ 117. Based on
these facts, Everest alleges that Midwest breached the Leases
by failing to negotiate in good faith the terms of the
renewal or purchase, and by unilaterally designating the
also asserts four causes of action relating to damages it
claims to have incurred as a result of Midwest's
interference with subleases (the "Subleases") of
the railcars that Everest entered into with Everest
Halliburton Energy Services, Inc. ("Halliburton").
The parties - Everest, Midwest and Halliburton - entered into
an agreement under which Halliburton made rent payments owed
under the Subleases to a lock box controlled by Midwest.
Midwest, in turn, after deducting rental payments owed by
Everest to Midwest, then remitted the remaining balance to
Everest. Id. ¶¶ 141-42.
Subleases provide that Halliburton must pay rent until the
railcars are returned to Everest. Halliburton has not yet
returned the railcars, and therefore continues to owe rent to
Everest. Id. ¶¶ 144-46. However, since
December 30, 2015, Everest has not received any remittal
payments from Midwest as paid through the lock box by
Halliburton. Id. ¶¶ 147-49. Everest
alleges that Midwest has converted Halliburton's rent
payments by withholding the excess from Everest or, in the
alternative, that Halliburton has ceased making payments to
the lock box as a result of Midwest's interference with
Everest's contractual relationship with Halliburton.
Everest asserts four counterclaims against Midwest relating
to Everest's relationship with Halliburton: conversion,
unfair competition, tortious interference with contract, and
tortious interference with prospective business relationship.
The Relevant Lease Terms
York law governs interpretation of the relevant contracts, as
the Master Lease Agreement provides that "this Agreement
and any Schedule hereto shall be interpreted under, and its
performance shall be governed by, the laws of the States of
New York." Master Lease Agreement § 28.
Everest's option to renew the leases or purchase the
railcars, Section 11 of each of six Leases provides, as
relevant, as follows:
Extension; Purchase Options. Provided no Event of
Default has occurred and remains uncured, and upon Lessee
having provided Lessor with written notice not more than 360
days or less than 180 days prior to expiration of the ...