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Interstate Commerce Commission Termination Act Preempts Jersey City’s Redevelopment of Conrail Parcels Banner Image

Interstate Commerce Commission Termination Act Preempts Jersey City’s Redevelopment of Conrail Parcels

Month: March 2025

Interstate Commerce Commission Termination Act Preempts Jersey City’s Redevelopment of Conrail Parcels

Posted on by Christie Bowness

What You Need to Know

  • ICCTA Preemption: The Court ruled that the Interstate Commerce Commission Termination Act (ICCTA) preempted the City Council's decision to designate certain property in Jersey City as an area in need of redevelopment (AINR). This includes parcels with active rail lines and those used for accessing the rail line, even if some of the parcels do not directly contain a rail line.
  • Railroad Operations Protection: The Court emphasized that ICCTA protects railroads from local zoning and land-use regulations that could interfere with railroad operations. Designating property as an AINR could create regulatory complexity and uncertainty, which may deter investments in freight rail operations on the property.
  • Contiguous Land Considerations: The Court rejected the idea that an AINR designation could apply to properties without active rail lines, as the designated property in question is a contiguous plot with an active rail line running through its center. ICCTA provides exclusive jurisdiction over such railroad-related properties.
  • Implications for Redevelopment Plans: Even if redevelopment was not currently planned, the Court stated that any AINR designation could potentially hinder future railroad use and violate ICCTA's broad preemption of local zoning laws. The ruling suggests that municipalities must consider ICCTA’s authority before pursuing redevelopment designations for properties tied to active rail use.

Introduction

In a recent ruling from the Superior Court of New Jersey, Appellate Division, the Court held that the City Council of the City of Jersey City’s (the “Council”) decision to designate certain property as an area in need of redevelopment (“AINR”) was preempted by the Interstate Commerce Commission Termination Act (“ICCTA”) even when certain parcels of the Property did not contain a rail line. CONRAIL v. City Council, No. A-1246-22, 2025 N.J. Super. Unpub. LEXIS 475, *3 (App. Div. Mar. 27, 2025).

Background and Procedural History

Consolidated Rail Corporation (“Conrail”) is a rail carrier that owns twenty-eight parcels in Jersey City (the “Property”). Conrail’s parcels are next to the National Docks freight rail line, which remains active and runs through the center of the Property. The rail line is situated on some of  the Property’s parcels and many of the remaining parcels are used to access the active rail line.

On February 10, 2021, the Council passed a resolution (the “Preliminary Resolution”) requiring the Jersey City Planning Board (the “Board”) to commission a study to determine whether a certain area, “which included the Property, satisfied the statutory criteria of the Local Redevelopment and Housing Law, N.J.S.A. 40A:12A-1 to -89, for designations as an AINR.” The Preliminary Resolution divided the study into two sections: “(1) eight lots not owned by Conrail (Condemnation Study Area); and (2) the remaining thirty-five lots, including the Property (Non-Condemnation Study Area).” In connection with the review of the Non-Condemnation Study Area, Jersey City’s City Planner prepared a report that determined “an active freight line runs across seven of the lots” and the other lots are either “adjacent to active rail lines” or littered with “inactive rail infrastructure.” The City Planner recommended that the Non-Condemnation Study Area, which included the Property, be declared an AINR.

Conrail submitted the following objections to the Board: (1) ICCTA preempts “local zoning and land-use regulation of the Property, including designation as an AINR, because the Property is the site of an active rail line”; (2) “the Property does not meet the statutory criteria for designation as an AINR”; and (3) there is no reason to declare the Property an AINR “because Conrail has no desire to use the Property for any purpose other than railroad use.”

Notwithstanding Conrail’s objection, the Board recommended that the Council designate the Property as an AINR. Conrail again submitted its objections to the Council. However, “the Council, without discussion, adopted the Resolution designating the Non-Condemnation Study Area, including the Property, as an AINR.” As a result, Conrail filed a complaint in lieu of prerogative writs in the New Jersey Superior Court Law Division directly challenging the determination of the Board and Council. The trial court held that the Council’s decision to designate the Property as an AINR was arbitrary, capricious, and unreasonable because “ICCTA preempts the Council’s authority to designate the Property as an AINR.” The trial court further reasoned that even if ICCTA did not preempt the Council’s decision, “the Council lacked sufficient evidentiary support to meet the statutory criteria for the designation[]” as “the Property has supported an active rail line since around 1871 and continues to be used for that purpose.” Indeed, the trial court found that the Council neglected to “identify the [necessary] smart growth planning principles” nor did it “establish inclusion of the Property in the AINR was necessary for effective redevelopment of other parcels” in the area. The Council appealed.

Decision

On appeal, the Council argued that ICCTA did not preempt the Property’s designation as an AINR, that a distinction can be made between the Conrail parcels on which an active rail line operates and those parcels not “used for railroad purposes,” and reiterated that the City Planner’s report supports “the statutory criteria for an AINR designation of the Property.”

The Court began by emphasizing that “the threshold issue in this case is whether the trial court erred when it determined the ICCTA preempts the Council’s inclusion of the Property in an AINR.”

ICCTA provides that “the federal Surface Transportation Board (STB) has ‘exclusive’ jurisdiction over the following:

(1) transportation by rail carriers, and the remedies

provided in [the ICCTA] with respect to rates,

classifications, rules (including car service,

interchange, and other operating rules), practices,

routes, services, and facilities of such carriers; and

(2) the construction, acquisition, operation,

abandonment, or discontinuance of spur, industrial,

team, switching, or side tracks, or facilities, even if the

tracks are located, or intended to be located, entirely in

one State . . . .

[49 U.S.C.A. § 10501(b).]” Indeed, “[t]he ‘remedies provided under [the ICCTA] with respect to regulation of rail transportation are exclusive and preempt the remedies provided under . . . State law.” (quoting [49 U.S.C.A. § 10501(b).]).

The Court determined that “[t]he Property, which contains railroad tracks, facilities, equipment, yards, and grounds used or necessary for Conrail's operation of an active railroad, falls within” the applicable definitions of ICCTA. Further, the Court reasoned that the areas of the Property that are “undeveloped” provide a way for Conrail to access the railway and keeps a “buffer” between the public and the active railway. After a comprehensive review of the New Jersey Supreme Court’s interpretation of ICCTA, the Court rejected the Council’s assertion that its designation of the Property as an AINR “has no impact on Conrail’s use of the Property for railroad purposes and will be legally significant only if Conrail abandons such use.” Instead, the Court agreed with Conrail and found that the broad authority granted to a municipality as a result of an AINR designation is preempted by ICCTA.

The Court reasoned that an “AIRN designation is the first step in imposing a redevelopment plan on the parcels in the designated area[]” and such designation “is a means of imposing zoning and land-use regulations on the parcels in the AINR.” Thus, the Court held that “the broad preemption in the ICCTA of zoning and land-use regulation of railroad properties encompasses an AINR designation.” Specifically, “the potential of a zoning or land-use regulation to interfere with railroad operations . . . triggers ICCTA preemption.”

The Court rejected the Council’s assertion that simply designating the Property as an AIRN does not violate ICCTA as the Court reasoned that “the AINR designation, even if the Council does not undertake redevelopment, creates regulatory complexity and uncertainty with respect to the Property that could deter Conrail from investing in freight rail transportation activities on the Property.”  The Court also rejected the Council’s argument that an AINR designation is appropriate for the parcels that do not have an active rail line running through them. The Court found that the record below demonstrated that “the Property is a contiguous plot of land with an active railroad running through its center[]” and ICCTA provides that the STB has “exclusion jurisdiction” over rail lines and “any ‘yard, property, facility, instrumentality, or equipment of any kind related to the movement of passengers or property.’” (quoting 49 U.S.C.A. § 10102(9)). The Court determined that the Council failed to meet its burden under ICCTA to show that the Property “is not and will not be needed for rail purposes”.

Because the Court determined that the Council’s designation of the Property as an AINR was preempted by ICCTA it did not opine as to whether the Council “satisfied the statutory criteria for the AINR designation.” Finally, the Court called into question the Council’s decision to designate the Property as an AINR in the first place as the Council conceded that any redevelopment of the Property “while it is in railroad use” would be preempted by ICCTA and its fear that Conrail would sell the property to a developer only cut against the Council’s assertion that an AINR designation was necessary.

Takeaways

This case reinforces the preemption authority of ICCTA over State law. It offers a reminder to local planning boards and councils that designation of property as an AINR, even if redevelopment is not currently contemplated, must consider and comply with federal statutes, such as the ICCTA, when they are applicable. As local communities look to redevelop land once used and/or currently used for railway transportation, they should be mindful of the extensive reach of ICCTA.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, Matthews Florez at mflorez@riker.com, Kori Pruett at kpruett@riker.com or Shelley Wu at swu@riker.com.

Summary Judgment Granted Where Property Seller Had No Knowledge of Actual Location of Utility Lines

Posted on by Christie Bowness

What You Need to Know

  • Seller's Knowledge and Duty to Disclose: The Court found that because the seller had no actual knowledge of the specific location of the utility lines running through the property, it had no obligation to disclose this information to the buyer. This highlights that, under Montana law, a duty to disclose only arises if the seller has actual knowledge of a defect or issue.
  • Mutual Mistake and Contract Rescission: The Court ruled that a mutual mistake could only justify rescission of the contract if the mistake was so significant that it made the property unmarketable or unbuildable. In this case, the underground utility lines did not render the property unbuildable or substantially decrease its value, so rescission was not warranted.
  • Implication for Property Buyers: This case underscores the importance of thoroughly investigating all aspects of a property, including easements, utility lines, and their locations, before making a purchase decision..

Introduction

In a recent case from the United States District Court, District of Montana, the Court granted summary judgment in favor of a property seller, where the seller had no knowledge of utility lines running through a portion of the building envelope of the property. Mark R. Kiesel Living Tr. v. Hyde, No. CV 22-109-M-KLD, 2024 U.S. Dist. LEXIS 156712 (D. Mont. Aug. 30, 2024).

Facts

In November 1999, Defendant Thomas Hyde entered into a contract for a deed with Stock Farm, LLC to buy property in Hamilton, Montana (“Lot 31”). Lot 31 was a subdivision located in a gated residential community, which was governed by the Stock Farm Homeowners’ Association (“HOA”). Before he purchased the Lot, Defendant was involved in the founding of Stock Farm, including the formation of the covenants and restrictions governing subdivision development. One of the restrictions was “[n]o building shall be constructed outside of the designated building envelope . . . unless approved by [the HOA].” This was critical to the scheme that was designed to maximize the residents’ views and privacy. In 2002, Defendant hired an architect to design a home on the Lot, and the architect prepared three preliminary designs that depicted a line running through the building envelope of the property, with the first drawing labeling the line as “Sewer L,” the second labeling the line as “S,” and third with the line unlabeled.

Defendant eventually decided not to build on Lot 31, and instead sold it to Plaintiff Mark Kiesel nineteen years later in 2021 for $900,000. After closing, Plaintiff hired architects to design his home, including the same architect that Defendant had hired in 2002. The home was going to be a 7,000 to 8,000 square foot home at a construction cost ranging from $3.5 million to $4.8 million. During the process of planning the construction, Plaintiff discovered that the sewer line, as well as the gas and electrical service lines, ran through the building envelope of the property. That limited the development plans, including the size of the home. It was estimated that: (1) if the lines were not moved, a home encompassing only 5,874 square foot could be built or (2) it would cost $176,995 to move the lines outside the building envelope.

At that time, the architect informed Plaintiff that he had prepared the 2002 preliminary designs for Defendant, showing that sewer line. Plaintiff demanded that Defendant rescind the buy-sell agreement for the property, which Defendant refused.

Plaintiff subsequently filed suit against Defendant, arguing that the existence of the utility lines and their location significantly impacted his ability to use and enjoy the property, and substantially decreased its value. He also alleged that Defendant knew or should have known of the utility lines, and had a legal obligation to disclose them prior to the sale of the property but failed to do so. Defendant moved for summary judgment on all of Plaintiff’s claims, and Plaintiff cross-moved for partial summary judgment.

Decision

The Court laid out the parties’ arguments regarding Plaintiff’s constructive notice of the utility lines, granting summary judgment to the Defendant after weighing the equities as to both parties.

First, Defendant argued that several publicly recorded documents, including the property plat, covenants, and easement, provided Plaintiff with constructive notice that the utility lines ran through the Lot. Both the language of the plat and covenants noted that properties within the Stock Farm subdivisions are “subject to” utility easements. Further, the preliminary title commitments for the property disclosed the above records, as well as the recording of an easement for the benefit of Montana Power Company, which permitted the Company to lay gas lines through the subdivision. Based on these documents, Defendant argued that Plaintiff had constructive notice of the lines and did not do his due diligence as to where they were located.  Thus, he was entitled to summary judgment.

Among other arguments, Plaintiff countered that the language of the recorded documents only stated that the property was “subject to” utility easements, and did not describe the scope and actual physical location of any utility easements on the property.

The Court determined that Plaintiff did not have constructive notice of the lines running through the Lot’s building envelope, as none of the recorded easements or covenants indicated the lines’ actual location. Further, the covenants themselves indicated that lines were not to be installed over, under, or through any dwelling on the Lot, or unreasonably interfere with the use of any Lot. According to the Court, this language would not have put Plaintiff on constructive notice of the lines’ actual location.

However, the Court also found that Defendant did not have knowledge of the location of the utility lines prior to the sale of the property, which was dispositive to Plaintiff’s claims that Defendant knew or should have known of the lines, and failed to disclose them. Specifically, during the discovery process, Defendant testified that he visited the property, but never noticed anything indicating the utility lines ran through any particular place on the Lot. He also testified that he did not recall seeing the architect’s preliminary diagram, where “Sewer Line” was labeled as running through the residential designations.

Plaintiff argued that Defendant’s longstanding involvement with Stock Farm, including his involvement in establishing the covenants, along with the three drawings that the architect said he must have provided the Defendant, proves that Defendant did know about the existence of the utility lines. At minimum, Plaintiff argued that the drawing designs created a genuine issue of material fact as to whether Defendant had knowledge.

The Court disagreed, reasoning that even construing the evidence in the light most favorable to Plaintiff, Plaintiff was unable to raise a genuine issue of material fact. Critical to the Court’s ruling was testimony from the architect that he was not certain, or even concerned about the location of the sewer line when he drew the designs, and the designs did not accurately depict the sewer line’s actual location. Therefore, even assuming Defendant received the architect’s designs, they would not have put him on notice of the actual location of the sewer line. Further, even the covenants, which reserved a utility easement and required that all utility lines be placed underground, did not put Defendant on notice that the actual lines were located underneath the building envelope of the property.

As such, without evidence demonstrating that Defendant knew of the location of the utility lines, Plaintiff could not establish that Defendant owed a duty to disclose the information, as under controlling Montana Supreme Court caselaw, Woodahl v. Matthews, 639 P.2d 1165 (Mont. 1992), knowledge of the defect is necessary for a party to have an obligation to disclose it. This finding ended the Plaintiff’s fraud, constructive fraud, negligence and negligent representation claims.

As to the contract claim, Plaintiff argued that the express terms of the buy-sell contract required that Defendant convey the property free and clear of encumbrances not otherwise described in the title insurance commitment. There, the Court found that even though the title commitment did not specifically notify Plaintiff that the utility lines crossed through the building envelope of the property, the agreement did not require that the commitment provide that level of specificity, so there could be no express breach of the contract.

Under Montana state law, a party may rescind a contract if the consent of a party was given by fraud or by mutual mistake. There, Plaintiff could not successfully make out a fraud claim because Defendant had no knowledge of the lines. As to mutual mistake, rescission is only warranted under Montana case law if the mistake was so substantial as to defeat the object of the transaction. Under that case law, if the property is habitable, then the party has received the property they had bargained for.

Here, the Court found that the undisputed evidence showed the property has not been rendered unbuildable by the existence of the utility lines. The Court determined that the total cost of moving the lines was not so substantial as to render the property unmarketable. Moreover and more importantly, it was undisputable that it was possible to build a residence comparable to other residences in the subdivision. As such, any mutual mistake regarding the utility lines was not so substantial as to warrant rescission.

Takeaway

This case highlights the significance of thorough examination and investigation into a property prior to purchase and understanding exactly where easements run across one’s property.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, Matthews Florez at mflorez@riker.com, Kori Pruett at kpruett@riker.com or Shelley Wu at swu@riker.com.

North Carolina Supreme Court Weighs Equitable Subrogation in Execution Sale Dispute

Posted on by Christie Bowness

What You Need to Know

  • Equitable Subrogation Doctrine: MidFirst reaffirms the principle that a lender who pays off a prior mortgage may be subrogated to the rights of the original lender, effectively stepping into their shoes in terms of lien priority.
  • Court's Focus on Facts: This case underscores that decisions about equitable subrogation depend on the facts of the case. The Court remanded the case to the trial court to determine whether Nationstar was "culpably negligent" by failing to notice the recorded judgment lien
  • Importance of Due Diligence: The Court highlighted that the refinancing lender failed to provide evidence of performing a title search or obtaining a credit report. This raised concerns of negligence, which could potentially impact the application of equitable subrogation.

Introduction

In a decision from the Supreme Court of North Carolina, the Court considered the principle of equitable subrogation in the context of a pre-existing, unrelated judgment against a mortgager that attested to there being no outstanding liens at the time of the mortgage. The issue considered by the Court was whether the mortgagee’s successor was entitled to equitable subrogation following an execution sale to satisfy the prior judgment. MidFirst Bank v. Brown, 386 N.C. 103 (2024).

Background

In 2000, Brown took title to the subject property in Charlotte, North Carolina (the “Property”). In 2004, Brown obtained a loan from First Horizon Home Loan (the “First Horizon Loan”) in the amount of $265,100.00 secured by a recorded deed of trust. In 2010, an unrelated judgment in South Carolina was entered against Brown, and subsequently domesticated by United General Title Insurance Company (“United”) and recorded in Mecklenburg County, North Carolina.

In 2016, Brown refinanced the First Horizon Loan by mortgaging the Property with Nationstar Mortgage LLC (“Nationstar”). Under the terms of this agreement, Nationstar paid off the remainder of the First Horizon Loan in the amount of $219,873.01, and Brown affirmed that there were no outstanding liens. The deed of trust for the Nationstar loan was subsequently recorded. Plaintiff MidFirst Bank was Nationstar’s successor in interest for the 2016 loan.

In 2019, United began enforcement proceedings against Brown to collect the South Carolina judgment. The Mecklenburg County Sheriff’s Office seized the Property and held an execution sale. Brown’s daughter successfully bid $102,900 in satisfaction of the United judgment. Brown continued to reside at the subject property.

MidFirst Bank filed a complaint seeking to quiet title via declaratory judgment, alleging that the Nationstar deed of trust continued to encumber the subject property after the execution sale. Alternatively, MidFirst Bank argued that the doctrine of equitable subrogation applied to subrogate Nationstar to the rights and priorities of the First Horizon deed of trust.

Defendant and MidFirst Bank filed cross motions for summary judgment. The trial court granted MidFirst Bank’s motion. On appeal, the Court of Appeals held that equitable subrogation was not available to MidFirst Bank, and the Bank filed a petition for discretionary review with the Supreme Court seeking review of this issue.

The Decision

In its discretionary review, the Supreme Court noted that the rule of equitable subrogation was “settled”:

[W]here money is expressly advanced in order to extinguish a prior encumbrance, and is used for this purpose, . . . the lender or mortgagee may be subrogated to the rights of the prior encumbrancer whose claim he has satisfied .... Also, if the money is advanced to a debtor to discharge an existing first mortgage upon his property, and in pursuance of an agreement that the lender is to have a first lien upon the property for the repayment of the sum loaned, the lender is entitled, as against a junior encumbrancer, to be treated as the assignee of the first mortgage which has been paid off and discharged with the money loaned, whenever it becomes necessary to do so to effectuate the agreement with the lender, and to prevent the junior encumbrance from being raised accidentally to the dignity of a first lien, contrary to the intention of the parties.

Additionally, the Supreme Court noted three exceptions that exist to the general rule, where equitable subrogation will not be granted to: (1) a “volunteer”, and (2) a party “guilty of culpable negligence”, and (3) where it would prejudice the junior lien holder.

Since it was undisputed that the Nationstar loan was provided to Brown on the condition that it be used to pay off the First Horizon Loan and Nationstar in fact did so, equitable subrogation clearly applied. Therefore, the Supreme Court considered whether any of the aforementioned exceptions applied.

Since payoff of the First Horizon Loan was a condition of the refinancing loan, Nationstar was not a volunteer. Concerning the third exception, the Court noted that in this instance, the lower court should consider that United’s lien had been satisfied. Thus, the only party prejudiced would have been the debtor Brown’s daughter if MidFirst Bank’s lien was sustained up to the amount paid to satisfy the prior mortgage.

Regarding the second exception, the Supreme Court noted it was “extremely concerning” that Nationstar failed to produce any evidence that a title search was conducted or that a credit report was obtained. However, (1) Brown had attested to there being no other liens encumbering the Property, (2) his daughter purchased the Property at the execution sale for an amount substantially less than the amount owed under the Nationstar loan, and (3) Brown still lived on the Property. Ultimately, however, the Court held that a determination of whether Nationstar was culpably negligent for failing to be aware of the recorded United lien and the resulting displacement of their intended first lien priority, was a fact-intensive inquiry and remanded it to the trial court for reassessment. As framed by the Supreme Court, the critical question on remand was whether Nationstar acted with the degree of care of a lender of ordinary prudence under the circumstances.

Takeaways

This highlights the application of equitable subrogation in property disputes and a trial court's role in balancing equities when conducting the required fact-sensitive analysis. Per the North Carolina Supreme Court, the equitable subrogation doctrine clearly applied, subject to application of exceptions on remand. The Court also guided the lower court’s analysis on remand; noting that it should take into account that the mortgagor’s application failed to disclose the existence of a prior lien and that his own daughter purchased the property at a discounted price at the subsequent execution sale, but also that the plaintiff failed to produce evidence of having conducted a title search. Accordingly, the case confirms the obvious: the importance of searching the underlying record for preexisting liens or encumbrances not voluntarily disclosed. At the same time, it signals that courts will not allow a debtor to willfully fail to disclose liens in loan applications and then seize on mistakes made by the lender based on that non-disclosure.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, Matthews Florez at mflorez@riker.com, Kori Pruett at kpruett@riker.com or Shelley Wu at swu@riker.com.

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