NJ Appellate Division Case Highlights Importance of Thorough Due Diligence Regarding Properties Containing “Abandoned” Railroad Lines
The conveyance of property containing embankments or former railroad facilities may invoke complicated title issues that could lead to significant costs and delays for real estate purchasers seeking to develop the property if such issues are not adequately addressed prior to the acquisition.
On January 23, 2019, the New Jersey Appellate Division issued an unpublished decision in 212 Marin Boulevard, LLC, et al. v. Chicago Title Insurance Company and Consolidated Rail Corporation, concerning a party’s alleged misrepresentation about whether the conveyed embankment property was subject to the Surface Transportation Board’s (“STB”) abandonment authority. The STB is the federal agency established to oversee rate and service disputes for railways, as well as railway restructuring transactions, including abandonment of rail lines. Presumptively, any abandonment of rail lines by an entity regulated by the STB requires STB approval, unless excepted under federal statute. The seller, Consolidated Rail Corporation (“Conrail”), represented to Chicago Title Insurance Company (“Chicago Title”) that STB abandonment was not required, and Chicago Title, in apparent reliance on this statement, issued policies for the conveyed parcels when the purchaser closed on the property. Even so, the Appellate Division rejected Chicago Title’s third party complaint against Conrail for negligent misrepresentation. The decision should remind real estate developers to be wary of properties containing railroad lines, whether in use or not, particularly if they are still owned by a railroad company. Developers purchasing these types of properties should undertake an extra level of analysis and due diligence to ensure any abandonment issues regarding the railroad lines do not hinder the planned project.
This was the second time this matter came before the Appellate Division. In the first decision, the court required Chicago Title to defend the plaintiffs’ title to the conveyed embankment property. Conrail had used part of the embankment as turnaround space for trains until 1994. Shortly thereafter, the tracks and bridges were removed and the facility was dismantled. In 2003, Conrail entered into a contract to sell the property to the plaintiffs. The plaintiffs inquired about possible railways issues and in 2005, Conrail advised the plaintiffs that the embankment was a “spur track,” meaning that the STB had no abandonment authority over the property. After closing, the plaintiffs sought subdivision approval from the Jersey City Planning Board. The subdivision was denied because the Planning Board concluded Conrail failed to receive STB approval to abandon the railway. In 2007, after the plaintiffs commenced a prerogative writ action, the STB declared that the property was not a spur track, but a rail line subject to its jurisdiction until its abandonment was authorized under federal law. The plaintiffs then commenced this action in 2009, seeking a declaration that the title policies obligated Chicago Title to defend their title, and eventually settled this dispute.
Chicago Title then prosecuted its third-party complaint against Conrail, which was the subject of this decision. Chicago Title sought contribution and indemnification from Conrail claiming that Conrail negligently misrepresented the property was not subject to the STB’s abandonment authority. The court focused on a 2005 email sent by Conrail’s counsel to an agent of Chicago Title prior to closing that stated the abandoned properties constituted “spur tracks” over which the STB had no authority and that no formal abandonment of the property was filed. The Appellate Division agreed with the trial court that Conrail’s 2005 email was a statement of opinion, rather than fact, and Chicago Title could not prove that either party knew the parcel was designated as a rail line based on this 2005 email. Chicago Title similarly failed to present persuasive evidence that it relied upon the 2005 email in issuing title insurance. Based on this, the Appellate Division agreed with the trial court that Chicago Title was not detrimentally and prejudicially induced into relying on the email.
This decision should serve as a warning to developers seeking to purchase property containing tracks or bridges of former railways, even those that have been dismantled. It is crucial to definitively determine which, if any, regulatory bodies have jurisdiction over the property and to ensure that the parties have received the required approvals from those bodies. Reliance on a railroad company’s representation regarding jurisdiction over the former railway may not be sufficient, and it is incumbent upon the purchaser/developer to perform the necessary, fact-sensitive analysis prior to purchasing the property.
If you have questions or concerns about the acquisition or development of property involving railroad lines, please contact Andrew Camelotto, a Director in the Gibbons Real Property Department.