Daily Development for Wednesday, December 3, 2003 by: Patrick A. Randolph, Jr. Elmer F. Pierson Professor of Law UMKC School of Law Of Counsel: Blackwell Sanders Peper Martin Kansas City, Missouri dirt@umkc.edu RAILROADS; RIGHT OF WAY; FINANCIAL ASSISTANCE: No unconstitutional taking occurs when the Surface Transportation Board approves an offer of financial assistance to preserve use of a right of way and thereby thwarts the ability of a third party optionee to exercise the option to obtain the right of way for non railroad purposes. Borough of Columbia v. Surface Transportation Board, 342 F.3d 222 (3d Cir. 2003). The holder of an option to purchase a stretch of unused rail line sought review of the Surface Transportation Board's ("STB") approval of another party's "offer of financial assistance" ("OFA") to purchase the rail line and therefore facilitate continued rail service, as provided by the Federal Transportation Act (the "Act"). The federal Court of Appeals for the Third Circuit held that 1) the STB did not act arbitrarily or capriciously and 2) the STB did not effect an unconstitutional taking of the option holder's property. In 2001, Shawnee Run Greenway, Inc. ("Shawnee") acquired an option to purchase a 2.5-mile stretch of railroad in Pennsylvania. Shawnee intended to replace the tracks, which had not been used for more than a decade, with a trail and greenway. Later, Frank Sahd Salvage Center, Inc. ("Sahd") made an OFA to the defendant STB seeking to purchase the line with the express intent to use the dormant tracks for freight shipping. The Federal Surface Transportation Board ("STB") may permit abandonment of rail lines after a proper determination or by exemption when appropriate. Because contiguous line property is so difficult to accumulate after total abandonment, the STB can the use statutory remedy of "offers of financial assistance" ("OFA") to avoid line abandonment. 49 U.S.C. 10904. An OFA is an offer to purchase or subsidize the rail line and to facilitate continued freight rail service. When a timely OFA is filed, the STB must postpone the abandonment process. If the proponent of the OFA and the rail carrier fail to agree on the terms of the OFA transaction, the STB will set the conditions and compensation to which the carrier will be bound. If the OFA agrees to these terms, the abandonment procedure is dismissed and the OFA proponent is bound to run service on the line for a minimum of two years. . The STB approved Sahd's OFA and set the conditions and compensation for the Sahd's purchase of the line. This led to dismissal of the abandonment proceedings and thwarted the option. Shawnee and the Borough of Columbia challenged the STB's decision, asserting that the STB 1) departed from its own established precedent without reasoned explanation and 2) effected an unconstitutional taking of Shawnee's property. In asserting that the STB abandoned its precedent and acted arbitrarily and capriciously, the plaintiffs sought to persuade the court that, under the Act, 1) that the STB must evaluate the likelihood of continued rail service and 2) the STB's determination that Sahd genuinely contemplated continuing rail service was, without adequate evidentiary support. The court addressed these two issues separately. In disposing of the first issue, the court noted that it need not render a decision on the necessity of evaluating continued rail service because the STB, in line with its precedent, expressly considered the evidence bearing on Sahd's announced intention to resume use of the line. The court disposed of the second issue by admitting to the modest amount of evidence supporting the STB's finding, but nonetheless deferred to the STB's administrative determination with respect to the factual showing made by Sahd. The court emphasized that the STB looks at the totality of evidence to determine whether an OFA is supported by a genuine possibility of the implementation of rail service in the future, that an OFA is for continued freight service and not for some other purpose. In determining the takings issue, the court first discussed whether the STB violated the Fifth Amendment by taking property for a non-public use. In determining that accepting the OFA constituted a taking property for a public use, the court deferred to Congress's express policy in favor of the continuation of a rail system to meet public needs. 49 U.S.C. 10101(4). Next the court sought to determine whether a taking occurred, looking at "(1) the extent to which the regulation has interfered with distinct investment-backed expectations; (2) the economic impact of the regulation on the claimant; and (3) the character of the governmental action." Connolly v. Pension Benefit Guar. Corp. 475 U.S. 211, 224-25 (1986) (citations omitted). Here the court focused on the first prong of the analysis, finding that Shawnee's expectations included the understanding that unfavorable STB action might derail their plan. As evidenced by provisions of the agreements, Shawnee's negotiations with the line's owner openly incorporated calculations of the risk that a disappointing outcome in STB proceedings might ruin Shawnee's investment. Shawnee's investment was not taken; a condition to contractual performance was not met. Therefore, a taking did not occur. Comment 1: Obviously this is an issue of relatively narrow interest. But the question of abandonment of railroad lines comes to the fore on a somewhat regular basis these days. The editor had no known of the OFR practice before, and it is a useful piece of information for real estate lawyers engaged by industrial clients with railroad abandonment problems. Comment 2: There have also been a number of cases involving the question of when a public action is truly taken for a public purpose. The treatment of that issue here is valuable, though not surprising, since rail travel and shipping obviously have long been important issues for government. Note that if a private party has an interest in maintaining the railroad, it is likely to get a good leg up on any party interested in obtaining the railroad for some other purpose. Comment 3: It should also be noted that if the railroad right of way consisted of easement rights, and not fee, the railroad would not have been able to sell if for non-railroad purposes, since upon abandonment the property would have reverted to the servient owners. In many states all right of way originally obtained by condemnation is deemed to be an easement, even if the 19th Century condemnation order stated that a fee had been granted. Readers are encouraged to respond to or criticize this posting. Items reported on DIRT and in the ABA publications related to it are for general information purposes only and should not be relied upon in the course of representation or in the forming of decisions in legal matters. The same is true of all commentary provided by contributors to the DIRT list. Accuracy of data provided and opinions expressed by the DIRT editor the sole responsibility of the DIRT editor and are in no sense the publication of the ABA. Parties posting messages to DIRT are posting to a source that is readily accessible by members of the general public, and should take that fact into account in evaluating confidentiality issues. ABOUT DIRT: DIRT is an internet discussion group for serious real estate professionals. Message volume varies, but commonly runs 5 - 15 messages per work day. Daily Developments are posted every work day. To subscribe, send the message subscribe Dirt [your name] to listserv@listserv.umkc.edu To cancel your subscription, send the message signoff DIRT to the address: listserv@listserv.umkc.edu for information on other commands, send the message Help to the listserv address. DIRT has an alternate, more extensive coverage that includes not only commercial and general real estate matters but also focuses upon residential real estate matters. Because real estate brokers generally find this service more valuable, it is named “BrokerDIRT.” But residential specialist attorneys, title insurers, lenders and others interested in the residential market will want to subscribe to this alternative list. If you subscribe to BrokerDIRT, it is not necessary also to subscribe to DIRT, as BrokerDIRT carries all DIRT traffic in addition to the residential discussions. To subscribe to BrokerDIRT, send the message subscribe BrokerDIRT [your name] to listserv@listserv.umkc.edu To cancel your subscription to BrokerDIRT, send the message signoff BrokerDIRT to the address: listserv@listserv.umkc.edu DIRT is a service of the American Bar Association Section on Real Property, Probate & Trust Law and the University of Missouri, Kansas City, School of Law. Daily Developments are copyrighted by Patrick A. Randolph, Jr., Professor of Law, UMKC School of Law, but Professor Randolph grants permission for copying or distribution of Daily Developments for educational purposes, including professional continuing education, provided that no charge is imposed for such distribution and that appropriate credit is given to Professor Randolph, DIRT, and its sponsors. DIRT has a WebPage at: http://www.umkc.edu/dirt/ Members of the ABA Section on Real Property, Probate and Trust Law or of the National Association of Realtors can subscribe to a quarterly hardcopy report that includes all DIRT Daily Developments, many other cases, and periodic reviews of real estate oriented literature and state legislation by contacting Antonette Smith at (312) 988 5260 or asmith4@staff.abanet.org ----- To be removed from this mailing list, send an email message to listserv@listserv.umkc.edu with the text SIGNOFF DIRT. Please email manager@listserv.umkc.edu if you run into any problems. See for more information.