1899 Deed Trumps 2014 Facts

Perusing published opinions occasionally leads me to a decision of interest simply because the circumstances are so esoteric and unique, on the one hand, and the facts are sui generis and reach so far back in time, on the other—while, at the same time, raising the need for the adjudication of a broad panoply of contemporary factual and present day legal issues.  Just such a case is Niagara Mohawk Power Corporation v. Allied Healthcare Products, Inc., 2014 NY Slip Op 51463(U) (Sup. Ct. Albany Co. October 1, 2014, Platkin, J.).

According to the Court:

At issue in this litigation is the enforceability of a covenant to supply free electricity given in an 1899 deed, as amended by a 1903 settlement agreement. Plaintiff Niagara Mohawk Power Corporation d/b/a National Grid (“Niagara Mohawk”) brought this action seeking a judicial determination that it is not obliged to perform under the covenant. In an answer with cross-claims, defendant Albany Engineering Corporation (“AEC”) seeks a similar declaration. Defendant Allied Healthcare Products, Inc. (“AHP”) opposes the relief sought by Niagara Mohawk and AEC, and it seeks a judgment declaring the covenant to be valid and enforceable against both parties…

The Court summarized the background:

By deed dated January 19, 1899 (“1899 Deed” or “Deed”), Anna and Charles Frisbee conveyed to Colonial Trust Company (“Colonial Trust”) all of their water rights and privileges on the Kinderhook Creek (“Creek”). The rights were acquired in connection with the construction of a hydroelectric generation facility to supply electricity to the Albany & Hudson Railroad Company (“Railroad”). The Deed also provided that the Frisbees would convey up to four acres of land to the Railroad “for the erection of power houses, storage yards, etc.”

In return, the Frisbees received substantial monetary consideration, along with the promise that they “shall at all times be furnished free of cost all the power necessary for properly running the mills now located on their lands and premises adjacent to said creek as the same are now operated.” This free power could be supplied to the Frisbee’s Mill (“Mill”) “either directly from the water in [the] creek or by electricity from the power station or from both.”

The Stuyvesant Falls Hydroelectric Plant (“Hydro Plant”) was constructed on the eastern side of the Creek in or about 1900. In 1903, Colonial Trust, the Railroad and the Frisbees entered in a settlement agreement (“Settlement Agreement”) to resolve litigation pending in Supreme Court, Columbia County. The Railroad paid additional funds to the Frisbees and promised to continue supplying water power to the Mill until April 1, 1904. As of that date, the seventh clause of the Deed was amended to read as follows:

Seventh – it is hereby further covenanted and agreed that said first parties, or the survivors of them, their heirs or assigns shall, at all times hereafter, be furnished free of costs at the end of a wire or electrical conductor, at or by the place where their mills on said creek are now located electrical current for running motors of the first parties in said mills, or for other mechanical or manufacturing purposes on said premises, at such hours of day or night, and to such extent as the said first parties, or the survivor of them, their heirs or assigns, shall . . . . require . . . but not at any time to exceed four hundred horsepower, or its equivalent in electrical current . . . .

For their part, the Frisbees promised to make two conveyances to the Railroad: (1) an easement on the east side of the Creek for the Hydro Plant’s penstocks; and (2) a parcel of up to four acres of land on the west side of the Creek, the boundaries of which were to be designated by the Railroad (“4-acre parcel”).

The promised conveyances were made by deed dated November 30, 1903 (“1903 Deed”). The 1903 Deed does not reference the covenant to furnish free electricity (“Power Covenant”), the Settlement Agreement or the 1899 Deed.

The subsequent developments:

Niagara Mohawk and its predecessors owned and operated the Hydro Plant for many years.  In 1993, Niagara Mohawk took the plant out of service, and it surrendered the project license in 1996 to the Federal Energy Regulatory Commission (“FERC”). On July 30, 1999, the Hydro Plant was sold to Erie Boulevard Hydropower, LLP (“Erie”) as part of a broader divestiture of Niagara Mohawk’s hydroelectric generation assets. However, Niagara Mohawk retained the 4-acre parcel, which it uses to distribute electricity to residential and business customers in Columbia County, including AHP.

The Hydro Plant remained dormant throughout Erie’s ownership. However, FERC issued an order on December 30, 2003 reinstating the project license and transferring it to the Town of Stuyvesant and the Stuyvesant Falls Hydro Corporation (“SFHC”), a wholly owned subsidiary of AEC. In March 2008, following years of protracted condemnation proceedings, AEC purchased the Hydro Plant from Erie.

And the recent events:

After extensive rehabilitation, AEC returned the Hydro Plant to service on December 28, 2012. AEC uses the riparian rights and penstock easement conveyed by the Frisbees to generate hydroelectricity by diverting water from the Creek to the power station through two seven-foot diameter penstocks running under about one thousand feet of the Frisbees’ former land. All of the electricity generated at the Hydro Plant is sold by AEC to Niagara Mohawk pursuant to a purchase agreement.

The Frisbee Mill consists of two buildings located along the western shore of the Creek. The property remained under the ownership of the Frisbees until 1939. Following several intermediate conveyances, the Frisbee Mill was purchased by Thomas A. Edison, Inc. in 1947 for the manufacture of hospital gases. In 1965, Chemetron Corp. acquired the Mill and continued to use it for this purpose. Chemetron later sold its medical products division, including the Mill, to Chemetron-Medical Products, Inc. Following several intermediate mergers and acquisitions, the surviving entity was renamed Allied Healthcare Products, Inc. (“AHP”).

Prior to September 2004, AHP used the Mill to manufacture a product called “Baralyme”, a chemical agent used in anesthesia systems. However, on August 27, 2004, AHP entered into an agreement with Abbot Laboratories (“Abbott”) to withdraw Baralyme from the market and discontinue its manufacture. In return, AHP received a payment of $5.25 million, along with an additional $2.15 million to develop and commercialize an alternative product. By early 2009, AHP began manufacturing a substitute product at the Mill.

The threshold issue related to the enforceability of the Power Covenant:

The Power Covenant is an affirmative covenant. “It has long been the rule in this State . . . that a covenant to do an affirmative act, as distinguished from [one] merely negative in effect, does not run with the land so as to charge the burden of performance on a subsequent grantee”… “Regardless of the express recital in a deed that a covenant will run with the land, a promise to do an affirmative act contained in a deed is generally not binding upon subsequent grantees of the promisor unless certain well-defined and long-established legal requisites are satisfied”…

The party seeking enforcement of an affirmative covenant must establish: (1) the original parties intended the covenant to run with the affected property interests; (2) “privity of estate”; and (3) the covenant “touches” or “concerns” the affected property interests to a “substantial degree”…

As to “intent”, Supreme Court held that:

“In ascertaining intent at the time that the covenant was created, [courts] turn first to the language of the deed”…The 1903 Settlement Agreement recites “that the performance of the power covenant . . . was intended . . . to be and has, at all times, been a covenant running with the land, water rights and privileges hereby granted, and binding upon the persons or corporations who should from time to time be the owners thereof.” Given the clear terms of this express recital, the original parties plainly intended the burden of the Power Covenant to run with “the land, water rights and privileges” conveyed by the Frisbees…

As to the benefit, free electricity is to be supplied to “[the Frisbees], or the survivors of them, their heirs or assigns”. The inclusion of “heirs or assigns” language in the Settlement Agreement “is strong evidence that the grantor[s] and grantee intended that the covenant would run with the land”…particularly since the original Deed limited the benefit of the covenant to the Frisbees. Additional proof of intent is found in the Frisbees’ retention of adjacent land rendered more valuable by the covenant…Accordingly, it is apparent that the original contracting parties intended future owners of the Mill to receive the benefit of free electricity, even without the inclusion of express “successors” language in the Settlement Agreement…

Niagara Mohawk further argues that even if the original parties intended for the covenant to run with the land, the covenant was not intended to burden the 4-acre parcel. As Niagara Mohawk observes, the 1903 Deed does not refer to the Power Covenant or the prior instruments in which the Power Covenant does appear. Thus, according to Niagara Mohawk, the 1903 Deed manifests a clear intention to leave the 4-acre parcel unburdened by the Power Covenant.

While courts generally decline to look outside the four corners of an instrument of conveyance in the absence of ambiguity, the 1903 Deed cannot be read in isolation. The original Deed, which established the Power Covenant, called for the Frisbees to convey up to “four acres below [Stuyvesant Falls] for the erection of power houses, storage sheds, etc.” The Settlement Agreement, which clarified and strengthened the Power Covenant, made the Frisbees’ earlier promise to convey land definite by giving the Railroad the power to designate the boundaries of the conveyance. It was pursuant to these obligations that the 1903 Deed was delivered.

Given these circumstances, it is clear that the original parties intended the 1903 Deed to be read together with the original Deed and Settlement Agreement. All of the instruments were executed by the same parties, pertain to the same subject matter and reflect a common purpose…The 1903 Deed is “inextricably intertwined” with the earlier instruments that obliged its delivery…

In light of the foregoing and the plain language of the Settlement Agreement making the Power Covenant a burden “running with the land, water rights and privileges hereby granted”, the Court concludes that the parties intended the covenant to run with the 4-acre parcel — the only “land” granted pursuant to the Settlement Agreement.

As to “privity”, the Court concluded:

“In order to establish the privity requisite to enforce a . . . covenant, a party need only show that his property derives from the original grantor who imposed the covenant and whose property was benefited thereby, and concomitantly, that the party to be burdened derives his property from the original grantee who took the property subject to the restrictive covenant. This vertical privity arises wherever the party seeking to enforce the covenant has derived his title through a continuous lawful succession from the original grantor”…

In support of its motion for summary judgment, AHP has submitted detailed proof demonstrating the requisite privity. As no party has raised a question of fact or legal defense in opposition thereto, the element of privity has been established.

And, as to “touch and concern”, Justice Platkin held:

An affirmative covenant must “touch or concern” the relevant property interests to a substantial degree in order to be enforceable at law…While “[r]ecogniz[ing] that it might be inexpedient and perhaps impossible to formulate a rigid test or definition to cover all cases”, the Court of Appeals has stated that a “covenant should be held to touch or concern the land, to run with the land, if it affects the legal relations — the advantages and the burdens — of the parties to the covenant, as owners of particular parcels of land and not merely as members of the community in general, such as taxpayers or owners of other land”…“The test is based on the effect of the covenant rather than on technical distinctions”…The question is whether the covenant “in purpose and effect substantially alter[s] . . . the legal rights which otherwise would flow from ownership of land and which are connected with the land”…

Since its inception, the Power Covenant has given the owners of the Mill a valuable advantage: the right to have electricity “furnished free of costs”. The covenant is not personal in nature; it is a benefit associated with ownership of the “place where [the Frisbees’] mills on [the Creek was] located.” The covenant is further connected to the land by the proviso that free electricity is available only for certain types of industrial activities conducted on the land. And as successor to the Frisbees, AHP continues to draw free electricity at the specified location for prescribed uses. Thus, the Power Covenant has been and remains closely tied to the ownership and use of AHP’s land.

The burden of providing free electricity also pertains to the ownership and use of the relevant property interests. The riparian rights allow electricity to be generated by diverting the flow of the Creek, and the easement allows large penstocks to traverse a long swath of AHP’s land and deliver water from the Creek to the power station. AEC continues to use these rights to generate hydro-electricity.

And while power has never been generated on the 4-acre parcel, the land historically has played a role in supporting the operation of the Hydro Plant and in the performance of the Power Covenant. The record shows that the 4-acre parcel had been used to store coal and oil for the Hydro Plant’s back-up generators, which generated electricity when sufficient hydro-power was not available from the Creek. Today, a portion of the 4-acre parcel is used by Niagara Mohawk for transmission and distribution equipment that supplies electricity to customers in Columbia County, including AHP.

The purported “intervening changes” and the alleged “decoupling from the land”:

To be sure, this would be a much simpler case if the “touch or concern” analysis were confined to the conditions existing at the inception of the covenant. At that time, a portion of the electricity generated using the burdened property rights was delivered to the benefitted land by means of a direct physical connection…Though not conceding the point, Niagara Mohawk and AEC do not seriously contend otherwise. Rather, their arguments focus on at least three types of intervening changes over the years that are said to have severed any substantial connection between the Power Covenant and the ownership and use of the relevant property interests.

First, AEC and Niagara Mohawk rely upon the availability of alternative sources of electricity for the Frisbee Mill. When the Frisbees conveyed their riparian rights to the Railroad, they relinquished the Mill’s only source of power: water power from the Creek. However, AHP’s facility has long since been connected to the electrical grid, and it has been almost a century since the Mill ran on electricity generated using the flow of the Creek. AHP’s access to and use of alternative sources of electricity unrelated to the Creek allegedly decouple the Power Covenant from the land.

Second, AEC and Niagara Mohawk identify a variety of intervening technological and regulatory changes that prevent electricity generated using the burdened property interests from being used directly in fulfillment of the Power Covenant. In brief, all of the power generated at the Hydro Plant is sold to Niagara Mohawk, AEC is legally prohibited from supplying electricity to AHP (or any other consumer), and AHP’s manufacturing plant could not utilize the asynchronous and varying current generated by the Hydro Plant, the availability of which is highly dependent on the level and flow of the Creek. Further, Niagara Mohawk has divested its power generation assets, and its role in New York is limited to serving as a supplier of energy transmission and distribution services. Given these changes that prevent the Power Covenant from being performed with electricity generated from the Creek, AEC and Niagara Mohawk assert that the burden of the covenant resembles a personal promise to pay money: AHP’s electric bill.

The third set of intervening changes relied upon by Niagara Mohawk and AEC pertain to the ownership and use of the burdened property interests. In the early days of the covenant, a single entity held and used this entire bundle of rights to operate the Hydro Plant and perform under the Power Covenant. Today, the power generation rights are held by one owner and the land by another. And the 4-acre parcel plays no part in the operations of the Hydro Plant, and its role with respect to the delivery of free electricity to AHP is no different than that of any other local Niagara Mohawk customer.

Continuing that:

In evaluating these arguments…the Court is mindful that the “touch or concern” analysis calls for a realistic, pragmatic focus on the substance of the relationship between the Power Covenant and the relevant property interests…A formalistic, overly technical approach is to be avoided…Further, the extent to which an affirmative covenant “touches” or “concerns” an interest in property is largely “a question of degree”… that turns “on the particular circumstances of [the] case”…

Applying the foregoing legal principles and precedents, the Court is satisfied that the Power Covenant touches or concerns each of the relevant property interests to a substantial degree, and the intervening changes relied upon by AEC and Niagara Mohawk are insufficient, either individually or collectively, to sever this longstanding and continuing relationship.

*     *     *

As to the burden, the riparian rights and penstock easement remain in use today for the purpose for which they were given: the generation of hydroelectricity. AEC uses the flow of the Creek, as channeled through the penstocks running under AHP’s land, to generate electricity, which it then sells to Niagara Mohawk. Despite the evident nexus between the ongoing generation of electricity using the burdened power-generation rights and the ongoing obligation to supply electricity to the adjacent land of the original grantors, AEC insists that the “touch or concern” requirement has not been established because the free electricity supplied to AHP is not, and cannot be, generated at the Hydro Plant. The Court disagrees.

Regardless of the intervening regulatory and technological changes cited in opposition to enforcement, AEC is capable of causing a portion of the electricity generated using burdened property interests, or its equivalent, to be delivered to AHP in fulfillment of the Power Covenant. This may entail a two-step process that involves the transfer of funds: Niagara Mohawk paying AEC for electricity generated using the burdened power-generation rights, and AEC returning a portion of these funds to Niagara Mohawk to pay for the “free” electricity supplied to AHP. But electricity is fungible, and any transfer of funds between AEC and Niagara Mohawk simply is an efficient means of overcoming the technical and legal barriers to performance of the covenant identified by AEC.

To hold otherwise would be to return to the hyper-technical, formalistic approach to “touch or concern” rejected by our Court of Appeals long ago. Further, the provision of electricity from sources other than the Hydro Plant is consistent with the intention of the original parties and the terms of the Settlement Agreement, which amended the original Deed to eliminate the requirement that electricity be supplied “from the power station”.

As to “perpetual burden”, the Court declared:

Having concluded that the Power Covenant touches and concerns all of the relevant property interests to a substantial degree, the Court must also consider Niagara Mohawk and AEC’s related contention that the covenant poses an impermissible burden in perpetuity. Courts called upon to enforce an affirmative covenant often look to whether the covenant poses an “undue restriction on alienation or an onerous burden in perpetuity”…While the parties have not cited any precedent holding an affirmative covenant invalid for this reason alone, the absence of “an outside limitation on the obligation . . . militates strongly against its enforcement”…

The Power Covenant does not include an express durational limit. Contrary to AHP’s contention, the use of the term “require” was not intended by the original parties to constitute such a limitation; it is clear that the term refers to the burdened party’s obligation to supply free electricity at such times and in such quantities as the owner of the Mill desires.

But the absence of an express temporal limitation does not render the covenant invalid or unenforceable.  [The Court of Appeals] upheld a seemingly unqualified obligation “to furnish steam heat” because the covenant, “by its terms”, continued only “so long as the heat-producing facilities remained on [the burdened party’s] land” and “both buildings are standing and in use”…Similarly, the burden of the Power Covenant would not continue if the relevant property interests became unusable for the generation, transmission or distribution of electricity.

And, as to an alleged “abandonment”, Justice Platkin wrote:

Nor have AEC or Niagara Mohawk shown any changed conditions that would result in extinguishment of the benefit of the covenant, such as a permanent abandonment of the Mill buildings or a permanent change in their character or use that would leave them unusable for the “running motors . . . or for other mechanical or manufacturing purposes on said premises”. A mere temporary pause in these activities cannot extinguish the covenant or sever its connection with the land.

Thus, while AEC and Niagara Mohawk attach great significance to the closure of AHP’s facility from 2004 to 2008, this proof falls short of demonstrating an intention on the part of AHP to permanently abandon the Power Covenant or manufacturing operations at the site. In fact, the only proof in the record is to the contrary, as it shows that AHP was contractually obliged to use commercially reasonable efforts to develop a Baralyme replacement during the plant shutdown and that it did so.

Further, Niagara Mohawk continued to perform under the Power Covenant at all pertinent times, and it made no contemporaneous claim of abandonment. Indeed, this claim comes only after AHP retrofitted its facility to manufacture a Baralyme replacement using covenanted power. And while Niagara Mohawk and AEC lament that they did not learn of the cessation of manufacturing until taking fact discovery in this action, Niagara Mohawk had actual knowledge of the power usage at AHP’s facility at all pertinent times, and the record shows that the shutdown of the facility was a public matter.

Concluding that:

For the reasons stated above, AHP has established as a matter of law that the Power Covenant runs with the riparian rights, penstock easement and 4-acre parcel, and the covenant is binding and enforceable against both AEC and Niagara Mohawk as the owners of these burdened property interests.  Accordingly, the Court grants AHP’s request for a declaration that it “is entitled to receive electrical power from [Niagara Mohawk] and/or AEC”[.]

The unusual facts and circumstances of Niagara Mohawk Power, especially the “ancient” lineage of the controlling and dispositive legal documents, teaches that signed “foundation” agreements can prevail through several generations of dynamic industrial and dramatic technological change.

Comments are closed.