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Home Insurance Company v. Chicago and Northwestern Transportation Company

May 23, 1995

THE HOME INSURANCE COMPANY, AS SUBROGEE OF THE NORTHEAST ILLINOIS REGIONAL RAILROAD CORPORATION, D/B/A METROPOLITAN RAIL-METRA,

PLAINTIFF-APPELLANT,

v.

THE CHICAGO AND NORTHWESTERN TRANSPORTATION COMPANY,

DEFENDANT-APPELLEE.



Appeal from the United States District Court for the Northern District of Illinois, Eastern Division.

No. 92 C 8002--George W. Lindberg, Judge.

Before COFFEY and EASTERBROOK, Circuit Judges, and MCDADE, District Judge. *fn1

COFFEY, Circuit Judge.

ARGUED JANUARY 18, 1995

DECIDED MAY 23, 1995

In 1990 four freight locomotive engines owned and operated by the Chicago and North Western Transportation Company (CNW) collided with and damaged two commuter passenger cars that CNW had leased from the Northeast Illinois Regional Commuter Railroad Corporation, doing business as Metropolitan Rail-Metra (Metra). Metra's insurer, Home Insurance Company (Home), brought this diversity action as subrogee of Metra against CNW, seeking to recover the replacement value of the destroyed commuter cars. The district court granted summary judgment in favor of CNW, holding that Metra and CNW's lease agreement limited CNW's liability to the casualty value of the destroyed cars. Home appeals, and we affirm.

I. Background

CNW is engaged in the business of providing commuter and freight transportation services by rail in the Chicago metropolitan and suburban areas. In June 1977 CNW and Metra entered into an Equipment Purchase Agreement whereby CNW sold its commuter railroad equipment to Metra at the depreciated book value (casualty value). In an "Equipment Lease" dated six months later, CNW agreed to lease the same equipment back from Metra, and to retain and use the leased equipment "for the purposes of [CNW's] usual business as a Transportation Agency providing Public Transportation Services by rail . . . ." The Equipment Lease also acknowledged that the parties had entered into "a Purchase of Service Agreement dated December 23, 1976, and effective as of July 1, 1975, *fn2 covering [CNW's] rail commuter service in the Chicago metropolitan region . . . ."

Under Article X of the Equipment Lease entitled "Railroad Equipment Replacement Responsibility," the parties set forth the extent of CNW's responsibility in the event that any of the leased commuter rail equipment was destroyed during the term of the lease. Section 10.01 of the Lease provides:

If any unit is destroyed, in whole or in part, from any cause whatever prior to the expiration of this Equipment Lease as to such Unit, [CNW] shall, at its option, either (a) repair or rebuild such Unit . . . , or (b) pay to [Metra] an amount equal to the depreciated book value (herein called the "Casualty Value") which such would have had on [CNW's] books immediately prior to the destruction of such Unit . . . , or (c) replace such Unit . . . .

On January 27, 1990, a CNW freight crew was operating a freight train comprised of four locomotive engines and a number of freight cars at a depot near Crystal Lake, Illinois when the crew lost control of the four locomotive engines (which were coupled together). The freight locomotives traveled without a crew toward McHenry, Illinois until they crashed into two unoccupied commuter railroad cars Metra had leased to CNW. CNW admits that it was negligent in handling the freight locomotives and that its negligence was the proximate cause of the damage to Metra's commuter cars. The cost of replacing the destroyed passenger cars was approximately $1.5 million.

Thereafter, Home, Metra's insurer, paid Metra $1 million for the destroyed cars and brought a subrogation action against CNW in an attempt to recoup its loss. CNW filed an affirmative defense based on Section 10.01 of the Equipment Lease and attempted to credit Metra only the casualty value of the passenger cars, which was $61,000. Home countered that Section 10.01 was inapplicable because its application was limited to accidents caused by CNW's commuter operations, and contended that the section did not set forth the sole remedy available to Metra. The district court granted summary judgment in favor of CNW, holding that Section 10.01 of the Equipment Lease gave CNW the option of paying only the casualty value of the destroyed leased property. The court also noted that "[i]t is difficult to conceive of how the parties to the Equipment Lease could have agreed to Section 10.01 contemplating that it not act as a limitation on CNW's liability for destruction in whole or in part of leased Units."

II. Analysis

We review a grant of summary judgment de novo, Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986), viewing the record and the inferences drawn from it in the light most favorable to the non-moving party. United States v. Diebold, Inc., 369 U.S. 654, 655 (1962). We will affirm if there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986). We apply the forum state's choice of law rules to determine what state's substantive law applies in this diversity action. Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487 (1941); S.A. Healy Co. v. Milwaukee Metropolitan Sewerage District, No. 94-3038, slip op. at 2 (7th Cir. March 23, 1995). CNW and Metra's Equipment Lease provides that the contract shall be construed in accordance with Illinois law. Illinois ...


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