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Midwest Railcar Corporation v. Everest Railcar Services, Inc.

United States District Court, S.D. New York

April 13, 2017




         Plaintiff 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.


         I. The First Amended Complaint

         Midwest's 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.

         The 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.

         On July 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. ¶¶ 32-33.

         Midwest 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.

         II. Everest's Counterclaims

         Everest's 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.

         Following 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.

         Having 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.

         Everest 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 return location.

         Everest 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.

         The 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.

         III. The Relevant Lease Terms

         New 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.

         Regarding 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 ...

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