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GATX Corp. v. Associated Energy Services, LP

United States District Court, N.D. Illinois, Eastern Division

August 17, 2016

GATX CORPORATION, a New York Corporation, Plaintiff,
ASSOCIATED ENGERY SERVICES, LP, a Texas limited partnership, and, SPARK ENERGY VENTURES, LLC, a Texas limited liability company, Defendants.


          CHARLES P. KOCORAS, District Judge

         Plaintiff GATX Corporation filed this two-count diversity action against Defendants Associated Energy Services LP (“AES”) and Spark Energy Ventures, LLC (“Spark”) on January 11, 2016. GATX alleges breach of a railcar “Car Service Contract” against AES (Count I) and breach of a related Guaranty against Spark (Count II). See Dkt. 1. Defendants filed their Answer, Affirmative Defenses, and Counterclaim [12] on March 28, 2016. Now before the Court are: (1) GATX’s “Motion to Dismiss Defendants’ Counterclaim, or in the Alternative, for Judgment on the Pleadings, and to Dismiss or Strike Defendants’ Affirmative Defenses, ” and (2) GATX’s “Motion for Partial Judgment on the Pleadings” [15]. For the reasons below, the first motion [14] is granted as to Defendants’ Third Affirmative Defense, and otherwise denied; and the second motion [15] is denied in its entirety.


         As required by Federal Rules of Civil Procedure 12(b)(6) and 12(c), the Court assumes the following allegations in Defendants’ Counterclaim to be true.[1] Between August and December 2013, AES and GATX entered into a “Car Service Contract” (the “Lease”) and two “Riders” to that agreement. Dkt. 12, at 14, ¶¶ 2-3. “The sole and exclusive purpose of the Lease and Riders No. 1 and 2 was for AES to lease Department of Transportation Specification 111 (‘DOT-111’) railcars to carry crude petroleum oil, ” id. at ¶ 4; and, consistent with that purpose, Riders No. 1 and 2 stated “that the leased Cars ‘may only be used to carry’ crude petroleum oil, ” and thus “affirmatively precluded AES from using the railcars for any other purpose.” Id. So, Defendants allege, “the parties understood and agreed that the Lease would not be of any value, and could not be performed, unless the DOT-111 Cars were used to carry crude petroleum oil.” Id. at ¶ 5. According to their Counterclaim, however, “numerous unforeseeable regulatory and industry events” in 2014 and 2015 “significantly affected the above-referenced implied condition of the Lease and otherwise effectively destroyed the fundamental purpose for the leased Cars.” Id. at ¶ 6.

         For a start, Defendants allege that the Pipeline and Hazardous Materials Safety Administration (“PHMSA”) published new rules in May 2015 that require “all DOT-111 railcars used to ship certain high-hazard materials (such as crude petroleum oil) to be replaced and/or substantially retrofitted within approximately three years, or on or before January 1, 2018.” Id. at ¶ 8. As a result, “DOT-111 railcars in their current form will generally not be authorized after that date for use in shipping highly flammable liquids such as crude petroleum oil.” Id. Canadian rail authorities also allegedly imposed new regulations that “generally prevent the use of DOT-111 railcars (in their current form) after May 1, 2017, ” and “placed an embargo on certain DOT-111 railcars built prior to 2011 (such as the Cars at issue in the Lease).” Id. at ¶ 10. Also during this timeframe, in response to several railcar accidents involving shipments of flammable liquids, “several federal agencies issued emergency orders or recommendations relating to new safety-related standards for railcars (including DOT-111 railcars) carrying flammable liquids such as crude petroleum oil.” Id. at ¶ 11. And in apparent response to these regulatory actions, Canadian and U.S. railroads began “imposing surcharges or favored discounts (ranging from $325 to approximately $1, 200 per car) relating to the use of any DOT-111 railcar.” Id. at ¶ 12.

         According to Defendants’ Counterclaim, “AES did not know, nor could AES/GATX have reasonably foreseen” (1) “that multiple railcar accidents involving the shipment of flammable liquids would occur, and that the United States and Canadian authorities would choose to further regulate DOT-111 railcars at least in part as a result of those accidents, ” (2) “that United States and Canadian authorities would respond to their increasing safety concerns by phasing out the DOT-111 railcars, such that DOT-111 can no longer be legally manufactured effective October 1, 2016, ” or (3) “that as an apparent result of the above, third-parties would impose substantial surcharges on the use of the very Cars subject to the Lease.” Id. at ¶ 13. Defendants also allege that these regulatory changes and private railroad surcharges “have materially destroyed AES’s performance under the Lease, ” “essentially wiped out the entire purpose of the Lease, ” and “changed the essential nature of AES’s performance under the Lease because it will require AES to operate under the Lease with what are now effectively ‘rolling dead’ railcars, and at a material financial loss.” Id. at ¶ 14. Defendants say that “AES’s losses will be so severe and unreasonable that the failure to excuse AES’s performance under the Lease would result in grave injustice.” Id. at ¶ 15. Defendants therefore seek rescission, to place the parties “in the status quo that existed prior to execution of the Lease.” Id. at ¶¶ 16-17.

         GATX filed this case in January 2016, alleging breach of the Lease by AES and breach of a related Guaranty by Spark. See Dkt. 1. According to GATX, “AES requested an early termination of the Lease” in “various communications” around September 2015, and “GATX refused AES’s request for early termination” and “informed AES that the Lease does not contain an early termination provision, and that the Cars shall remain on lease until the applicable expiration date of the riders.” Dkt. 1, at ¶¶ 30-33. GATX further alleges that, “AES stopped paying rent on the Cars in August 2015, ” id. at ¶ 38; “began sending the Cars to GATX’s facility . . . in an attempt to terminate the Lease without GATX’s consent, ” id. at ¶ 34; and “failed to clean the Cars of commodities as required.” Id. at ¶ 39. Thus, according to GATX, “AES has breached the Lease by failing to pay rent, terminating the Lease before its expiration, and failing to clean the Cars as required, ” id. at ¶ 41; and Spark has breached its Guaranty of AES’s “liabilities and obligations.” Id. at ¶¶ 52-53.

         In their Answer to GATX’s Complaint, Defendants asserted several affirmative defenses, including one alleging “the doctrines of commercial frustration and/or impossibility and/or impracticability in that, among other things, the Cars at issue have been the subject of substantial intervening regulatory and industry changes which were not reasonably foreseeable and which have resulted in the total or near total destruction of the value of AES’s performance under the Lease.” Dkt. 12, at 13. Defendants’ Counterclaim, in turn, incorporates these defenses and seeks rescission of the Lease based on the same facts. Id. at 14-18. GATX now moves pursuant to Rules 12(b)(6), 12(c), and 12(f) to strike Defendants’ Affirmative Defenses, dismiss their Counterclaim, and for judgment on the pleadings in GATX’s favor. Dkts. 14-15.


         The standards for dismissal under Rule 12(b)(6) and for judgment on the pleadings under Rule 12(c) are straightforward; a claim may be dismissed, or judgment on the pleadings granted, if the claim fails to state “a claim that is plausible on its face, ” meaning that the claim needs “factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” St. John, 822 F.3d at 389 (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)). Similarly, affirmative defenses may be struck under Rule 12(f) “only when they are insufficient on the face of the pleadings.” Williams v. Jader Fuel Co., Inc., 944 F.2d 1388, 1400 (7th Cir. 1991) (quotation omitted). As explained below, except for the challenge to Defendants’ Third Affirmative Defense (denying GATX’s right to consequential damages), GATX’s motions fail to meet these standards.

         I. Motion to Strike Defendants’ Affirmative Defenses

         The Court turns first to GATX’s request to strike Defendants’ Affirmative Defenses, since Defendants’ Counterclaim rests largely (if not entirely) on their First Affirmative Defense of “commercial frustration and/or impossibility and/or impracticability.” GATX correctly contends that, under Illinois law, [2] such a defense “is ‘not to be applied liberally’ and is only appropriate if a ‘rigorous’ two-part test is satisfied.” Dkt. 20, at 4 (quoting Blue Cross Blue Shield of Tenn. v. BCS Ins. Co., 517 F.Supp.2d 1050, 1059-60 (N.D. Ill. 2007)). Specifically, “a party must demonstrate that: ‘(1) the frustrating event was not reasonably foreseeable; and (2) the value of counterperformance has been totally or nearly totally destroyed by the frustrating event.’” Id. GATX is also correct that “the foreseeability of the frustrating circumstance and the ability of defendant to overcome it are questions of law to be resolved by the court.” Id. (citing Bartlett Commons Shopping Ctr. v. Schultz Sav-O-Stores, Inc., No. 92 C 2787, 1992 WL 345052, at *1 (quoting Northern Ill. Gas Co. v. Energy Coop., 122 Ill.App.3d 940, 952, 461 N.E.2d 1049, 1059 (3d Dist. 1984)). But GATX is incorrect in asserting that those issues may be resolved at the pleadings stage in the present case. See Scottsdale Ltd. P’ship v. Plitt Theatres, Inc., 97 C 8484, 1999 WL 281085, at *4 (N.D. Ill. Mar. 31, 1999) (denying motion to strike where plaintiff “sufficiently alleged both elements of commercial frustration”).

         As to the foreseeability prong, GATX argues that “new regulations were not unforeseeable as a matter of law, ” because the Lease demonstrates on its face that “the parties explicitly foresaw them.” Dkt. 20, at 5. To support that contention, GATX points to Paragraph 6 of the Lease, which “sets forth the agreed upon procedure if physical alterations or modifications to the Cars are ‘required by the AAR or any government, agency, group or committee exercising authority over rail car design or operation.’” Id. (quoting Dkt. 14-1, ¶ 6(b)). But Defendants counter that Paragraph 6 merely “purports to give GATX the authority to terminate the Lease, or substitute Cars within 60 days, if new regulations require modifications that GATX deems uneconomical” Dkt. 18, at 8; it does not address “the effect of new regulations on AES’s (as opposed to GATX’s) rights, ” or substantial surcharges or regulations that require “the phasing out of the Cars in their current form.” Id. at 9. Thus, while Paragraph 6 of the Lease does foreshadow the possibility of regulatory developments requiring modifications to individual cars, and this provision will certainly bear on the foreseeability of the regulatory sea change that Defendants allege, the Court agrees that this Paragraph alone does not dispose of that question at the pleadings stage.

         The same is true of the second “impossibility” prong. GATX argues that “AES’s continued performance was (and continues to be) possible” under the options provided by Paragraph 6-i.e., “to allow GATX to elect” to “(i) terminate the Lease if modifications were uneconomical, (ii) substitute the Cars, or (iii) modify the Cars and charge AES for the cost.” Dkt. 21, at 5. But this is all disputed, since AES contends (and alleges) not merely that the Cars require modification or substitution, but rather, “the phasing out of the Cars in their current form, ” Dkt. 18, at 9; Dkt. 12, Counterclaim, ¶¶ 7, 13, “which effectively destroyed the fundamental purpose for the leased Cars.” Dkt. 12, Counterclaim, ¶ 6, ¶ 14 (“regulatory changes surrounding DOT-111 rail cars, and the third-party surcharges, have material destroyed AES’s performance under the Lease”); Dkt. 18, at 3-4, 10 (same). Such an allegation that a party “will be unable to conduct its intended business at all” is sufficient to allege the impossibility prong of commercial frustration under Illinois law. Scottsdale, 1999 WL 281085, at *4.[3] Thus, while GATX is free to argue that the regulatory changes at ...

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