NETEX, Blacklands and the $11 million terminal

The fate of a $1.2 million U.S. Economic Development Administration grant hangs in the balance for both Hopkins and Franklin Counties, as a lawsuit between the Northeast Texas Rural Rail Transportation District (NETEX) and Blacklands railroad has played into a never-ending struggle while two communities who were promised jobs and millions of dollars of outside investments are left to pick up the pieces.

During the Monday, July 8 regular meeting of the Mount Vernon city council, members of the council voted 3-2 to “relinquish any and all right” to their city’s share of the $1.2 million grant they were awarded Jan. 1, 2018 to build a railport.

“God, I hate giving away $1.2 million,” city councilperson Stephanie Hyman said. “Everybody knows that this county needs something to bring in more business and more jobs.”

Sulphur Springs Economic Development Corporation (EDC) applied for the grant along with Mount Vernon, although the share they were awarded was lower at $325,140.

“The train section there, if we follow through on that, that could be a real game-changer for a few of our companies,” Craig Roberts, Sulphur Springs EDC board member said at their June meeting.

Sulphur Springs EDC executive director Roger Feagley says he “has some emails out,” but is “pretty sure” Hopkins County will still receive their portion of the grant, regardless of what Mount Vernon decides to do with their share.

“We’re kind of waiting to see how the dust settles,” Feagley said. “That’s kind of above my pay grade.”

What led the two towns from accepting a grant worth more than a million dollars to turning it back to the federal government? As Hyman, who voted against returning the funds, said, “NETEX’s project has come to a screeching halt because of their lawsuit.”

 

LAWSUIT

The Blacklands Railroad, owned and operated by Wayne Defebaugh out of Sulphur Springs, filed a lawsuit in the 62nd District Court in Hopkins County against NETEX on April 18 for greater than or equal to a million dollars.

NETEX engaged in breach of contract and business disparagement, the suit alleges.

“In or about May 2018 NETEX breached the operating agreement” by taking marketing and operating decisions away from Blacklands, the suit alleges.

A motion for dismissal, filed by NETEX on June 28, claims it was actually Black-lands that broke the operating agreement first in 2015 by failing to perform to standards.

With the two parties locked in litigation, even NETEX and Blacklands themselves are unsure how trains will continue to run on the lines.

On April 27, Blacklands Railroad, through a proxy, placed a two-column, 5.5-inch ad in the News-Telegram, stating there could be a disruption or discontinuation of their service due to their ongoing lawsuit with NETEX, their operator, according to News-Telegram records.

During their May open meeting, NETEX unanimously approved a measure to explore “investigation of alternative and emergency services and possible termination of emergency services.”

One of their major customers, the Northeast Texas Farmer’s Co-Op (NETFC), has expressed displeasure with the associated increase in cost of not having a secured shipper might bring.

Brad Johnson, president of NETFC, appeared before the Hopkins County Commissioners on May 20 and at the NETEX May meeting to read a resolution from NETFC that expressed a no confidence motion in the NETEX board.

Johnson cited lack of transparency on the part of the board and inability to secure a shipper through 2021 as major concerns of the Co-Op.

NETFC is a 6,000-member organization that operates within an approximately 100-mile radius surrounding Sulphur Springs and uses Black-lands and NETEX pathways to obtain feed for their Co-Op centers, according to Johnson.

NETFC, who presented to its assembled members on June 6 that it had brought in approximately $45.7 million for fiscal year 2019, said it fears “another railroad abandonment” and loss of $55,000 per month without another way to ship their 107,000 tons of feed per year if the NETEX/ Blacklands lawsuit reaches its conclusion.

 

HISTORY

Brad Johnson asked the assembled NETFC members to ask their county commissioners, “What it would be like to lose the railroad.” This is also Hopkins County Judge Robert Newsom’s fear, he told News-Telegram reporter Tammy Vinson at a July 1 Commissioner’s work session.

This fear harkens back to 1994, when the rail line known now as the NETEX/ Blacklands line was in danger of becoming non-operational.

In July 1994, NETEX formed as a multi-county entity to address the impending abandonment of 31 miles of railroad track that stretch from Greenville to Sulphur Springs. Covering Franklin, Hopkins, Hunt, and Titus counties, the state legislature swooped in during the 1995 session with an allocation for $2 million and allowed NETEX to purchase the track with simple fee interest.

In 2000, NETEX purchased an additional 35 miles of track, and in 2001, they purchased another 23.5 miles. A 2001 study by Texas A&M called NETEX “one of the most successful examples of an active and involved rail district board,” and attributed this success to “aggressive operator marketing and consistently high quality service.”

The near-death experience of the rail line remains in the collective memory of many in Hopkins area residents. The area thrived for many years as part of the Cotton Belt Route, and even had an operational passenger train. After years of disuse, it was little short of a miracle that breathed new life into the short line 25 years ago.

One thing that has not changed in the past 25 years since NETEX purchased the line, though, is the condition of the tracks. Pictures hosted on the NETEX website, taken in 2015 as part of a TIGER grant application, show warped boards, crooked tracks, and overgrown vegetation.

It’s a major hindrance for the shipper. Stated in NETEX documents, rail cars can only proceed on the tracks at 10 mph, far below 60 mph, the top achievable speed for freight trains.

Since 2009, NETEX’s main focus was improving the quality of the tracks. From 2009 to 2015, NETEX submitted TIGER grant applications each year to the federal government to attempt to secure funding for track repair.

Despite letters from legislators, judges and business-owners, they did not receive the funding they requested.

In 2016, finding itself exhausted, NETEX opened up to “expressions of interest… from outside parties interested in partnering, purchasing, or leasing NETEX-owned right of way.”

“The NETEX line is constructed of predominantly 112# jointed rail, which is in good condition, on ties that date from the 1930s to the 1980s, which are in bad to fair condition,” the document reads.

The money just wasn’t there, according to NETEX’s own documents. Although NETEX said it would continue to seek government funding, “there is currently no state of [sic] federal funding available for the rehabilitation of the line.”

It is not known at this time if NETEX received any private businesses interested in partnering with them in 2016 to repair the tracks.

According to meeting agendas in March 2017, NETEX sought the support of government officials Representative Gary VanDeaver, R-New Boston; Senator Bryan Hughes, R-Mineola; Congressman Ralph Hall, R-Rockwall; Representative Dan Flynn R-Canton; Representative Charles “Doc” Anderson R-Waco; and Representative Cole Hefner, R-Mount Pleasant to support allocating TxDOT money to repair the tracks.

By May 2017, it became clear through the NETEX agenda that they had failed to gain official legislative support.

 

THE BIG KAHUNA

Unable to secure smaller grants for track improvements, NETEX decided to dream bigger.

On March 9, 2017, the NETEX agenda featured an item regarding “recent investigations into the potential regional interest for a rail transload/ terminal in Northeast Texas.” Brad Hyman, then president of the Mount Vernon EDC, had been in “discussions with Lowe’s,” the document read.

Transload facilities, such as described by NETEX in those first documents, are facilities where goods can be transferred between trains and trucks, according to Union Pacific. Products arrive to a facility on a truck and are then transferred on to a train car by forklift, crane or pump, Union Pacific states. They are then shipped to their destination and unloaded as needed, sometimes back onto trucks, or onto another train car.

The Lowe’s distribution center in Mount Vernon, situated on I-30, is an ideal location for a rail facility. According to an article by the East Texas Journal, Lowe’s manager Tracy Reed stated the center handles the equivalent of 32,000 18-wheeler loads per year.

However, due to cost factors, Reed told the Journal, “the longer you can keep shipments on the train, the better.”

If NETEX and Mount Vernon’s EDC could somehow find a way to complete a rail project near — or even at — Lowe’s, “every person in the region will benefit from more business,” NETEX executive director Phil Davila wrote.

 

A PEACEFUL

COEXISTENCE

From May 2017 to April 2018, Phil Davila was a contractor for the city of Mount Vernon for “project development services,” according to his invoices.

During this time, Davila continued to draw his salary from NETEX. He is the only salaried employee of NETEX. The News-Telegram has requested access to NETEX’s financial records through open records requests, but has not yet received them.

On Dec. 18, 2017, the ARK-TEX Council of Governments (ATCOG), not Davila or NETEX, were the ones who finished and filed the paperwork to submit for a United States Economic Development Administration (USEDA) grant for the Mount Vernon/ Franklin County project.

For their role in preparing the grant application, ATCOG was not paid anything, according to ATCOG executive director Chris Brown.

By Jan. 1, 2018, the EDA had awarded Sulphur Springs and Mount Vernon the grant. According to an article by the Texarkana Gazette, U.S. Department of Commerce had also pledged $1.5 million towards the Mount Vernon/ Franklin County project, but it’s unclear whether or not those funds ever became operational.

“I’m a volunteer, as we all are,” Bryan Hyman told the Gazette. He did not mention the ongoing payments to Davila or NETEX.

The details given by the Gazette story predicted the creation of 82 local jobs with a long-term retention of 55 of those, and an influx of approximately $2 million in private investment.

The Gazette story estimated work to the railport project and overall improvements to the rail line would be completed by December 2018.

An April 23, 2018 story that appeared in the East Texas Journal echoed a similar timeline: that by “year’s end” there would be a new transload terminal near Mount Vernon.

That story stated that the EDC had an option on a nearly 200-acre site contiguous to the Lowe’s Distribution Center property on I-30 in Mount Vernon.

 

SCHISM

On March 26, 2018, Phil Davila submitted an email which he called “attempts to define my responsibility and authority as Project Manager” on the Mount Vernon/ Franklin County railport project. In this email, he proposed that he be paid $7424 per month, or approximately $89,088 per year as an independent contractor for the City of Mount Vernon.

Furthermore, Davila requested “an RV site with hookups at the Franklin County Water Districts Walleye Park for temporary living quarters” and reimbursement for “customer/marketing travel/meeting related expenses.”

Mount Vernon did not take Davila up on that offer.

Regarding the termination of payment for his services, Davila told the News-Telegram, “When the Mount Vernon EDC was awarded the contract, I proposed an arrangement with a scope of services that had been discussed previously and their response was that they could handle this grant and do the project.”

“With no contract, letter or purchase order,” he said, “I stopped working for the EDC and stopped invoicing for my time.”

A little more than one month later, at the May 31, 2018 Franklin County Commissioners meeting, Davila gave a powerpoint presentation about the Mount Vernon/ Franklin County project.

“After much discussion… everyone realized nobody was in charge and nobody knew who was going to run the project,” the commissioner’s summary document reads.

The very next day, June 1, 2018, a letter addressed from Sam Young, NETEX Chairman (who is also a Franklin County Commissioner), to Theresia Whims, mayor of Mount Vernon, states that the NETEX executive board “has decided to cease current efforts to continue participation in the development/ implementation of the RailPort project.”

NETEX’s letter stated there were “issues related to the EDC and City Council,” and that “NETEX will work with Franklin County to facilitate the implementation of the RailPort.”

It is not explicitly stated in this letter what the issues related to Mount Vernon’s EDC and city council are or why NETEX appeared to only want to work with Franklin County.

It wasn’t just on paper that NETEX refused to cooperate with the city of Mount Vernon and its EDC. A letter dated four days later was addressed to city manager Tina Rose from Judge Scott Lee, both a Franklin County judge and a member of the NETEX board.

The letter stated during that morning’s Franklin County commissioner’s meeting, “Agenda item number 6 was considered and approved designating NETEX as agent for Franklin County on the Railport project.”

This meant that in a legal sense, NETEX had the authority to operate as Franklin County’s proxy in all things railport.

By Aug. 27, Mount Vernon Optic Herald reported Franklin County had given NETEX the go-ahead to build a transload terminal.

In October 2018, the Franklin County Commissioner’s Court underscored its position that in a legal sense, Franklin County was no longer at the helm, NETEX was. The Oct. 31 meeting agenda states, “Judge Lee reported Franklin County has turned everything over to NETEX and cannot make decisions about the rail port.”

Although Mount Vernon still wanted input in the decision-making process during the Oct. 31 meeting, Franklin County denied the request. “The request from the City to be on the next agenda to get approval from the Commissioner’s Court to proceed with the rail port has been denied,” the document said. “The county cannot make any decision about the rail port.”

According to the Nov. 8 Mount Vernon Optic Herald article about this meeting, “all commissioners present indicated agreement with Judge Lee that the request should be ignored until the three entities involved come to a working agreement.”

“Until the city [and their EDC] and NETEX get together and work out an agreement, we don’t need to talk to them,” Lee was quoted as saying.

In December, Mount Vernon and their EDC requested in an email to appear at the NETEX meeting in front of the NETEX board members to discuss the project happening in their town. Cut out by both NETEX and Franklin County between June and December of 2018, a public notice suggests that Mount Vernon didn’t even know if they had NETEX’s support or not.

The public notice from the Mount Vernon EDC stated they would be appearing at the Dec. 6 meeting to “Offer a presentation to the NETEX board… and have the NETEX board vote to approve or deny a full endorsement and support of the facility.” NETEX’s agenda from Dec. 6 shows that Mount Vernon and their EDC did, in fact, make it to the meeting.

A Dec.15 email Phil Davila sent to Mount Vernon mayor Theresia Whims after this meeting called the discussion “contentious.”

In the email, Davila outlined three options for the city and its EDC, and two of them involved NETEX running the proposed facility. In one, the city was to build the facility and NETEX would buy it from them. In another, ATCOG would transfer the grant money directly to NETEX for NETEX to build the facility.

In the third proposed plan, the city could continue to do whatever they were going to do, and NETEX would continue to do whatever they were going to do.

The two sides, at an impasse, chose option three.

On Feb. 7, 2019, Davila rolled out a presentation about the rebranded Franklin County Container Terminal (FCCT) project. The slides do not make any mention of accessing the EDA grant money Mount Vernon received, it just happens to be located next to the same site where Mount Vernon had planned their rail port, according to a map on Davila’s presentation.

The facility could be cycling through 30,000 stacking containers by its third year, Davila estimated. He called it “truly a game changer” that could “help all Economic Development Corporations in the region,” in an email to the News-Telegram.

However, in an email about Mount Vernon’s own EDC, he said, “the city facility must not compete with the container terminal [FCCT] in any way.”

Without the EDA grant to pay for the newly proposed FCCT project, NETEX delivered a Jan. 15, 2019 letter of intent from Mesa, Arizona-based Sustainability Partners, a company that invests in infrastructure, according to an email to the News-Telegram.

The letter states the investment firm was willing to commit $11 million to the FCCT project, provided they bore out their due diligence. The three items they identified as key were identifying a functional terminal layout, cooperation meetings with Union Pacific and shipper identification and timetables.

Two of those fell apart, though, at the eleventh hour.

 

COMPLICATIONS

The first blow came on April 18, when Blacklands, NETEX’s operator, filed their lawsuit. Blacklands has asked for a trial by jury, according to Hopkins County district clerk Cheryl Fulcher, but a timetable of when this lawsuit may stand before a jury of Defebaugh and Davila’s peers is not certain. If NETEX’s motion carries, it may not happen at all.

The financial state of the two parties also plays into whether or not NETEX can continue work on the FCCT project. If Blacklands were to win the suit and NETEX had to pay a million dollars or more, could they continue to operate? News-Telegram reporter Taylor Nye submitted an open records request for NETEX’s financial records, but at time of publication, had not yet received them.

The second blow came on June 7. An email from Union Pacific’s Paul “Drew” Tessier to Davila and the NETEX board allegedly stated: “An inter-modal container facility at this [Franklin County] location does not make sense for UP [Union Pacific].”

With two of the due diligence conditions in their letter of intent unfulfilled and no terminal layout produced, the News-Telegram’s Nye reached out to Sustainability Partners to determine if they planned to move forward with their $11 million investment on the FCCT project. As of press time on July 10, no reply was given.

A media relations director from Union Pacific told News-Telegram’s Nye regarding the FCCT project, “We did not issue a news release, nor do we plan to at this time.”

Furthermore, Mount Vernon finds their property unuseable for a rail build. At 48 acres, according to land surveys, it is too small for a rail port site.

An investigation by News-Telegram reporter Taylor Nye in late June 2019 found the property to be in a lowland area and surrounded by at least four homes and a cattle ranch. After recent rains, the surrounding areas to be flooded and swampy.

Engineering reports delivered to Mount Vernon state that the land requires grading, retaining walls, and earthworks that may require approximately 250,000 cubic yards of cutting.

The “wetlands” nature of the property might require “four additional drainage structures,” wetlands permits, and creek crossings, Mount Vernon’s engineers said.

Additionally, visible ONCOR power lines might pose a problem, and “clearance is contingent upon the voltage of the power lines,” the document from the engineers said.

The site NETEX purchased for their rail build, less than a mile away from Mount Vernon’s site, is considerably bigger at 200 acres, according Davila’s February presentation. Mount Vernon’s survey maps show that the nearby NETEX property is also in densely-treed, lowland area.

Barred at every step, the Mount Vernon EDC voted on June 24, 2019 to give up their EDA grant.

According to Mount Vernon estimates, a total of $167,589.25 has been spent on a project that will not see completion. Of that, $38,508.51 went directly to Davila, and an additional $8,000 went to NETEX itself.

On July 8, Mount Vernon city councilperson Stephanie Hyman still hung on to hope, she said, and that is why she voted not to give the grant money back.

“This doesn’t have to be some humongous project,” she urged. “We need to be utilizing it, even if it’s for some small project… Can’t we still use our grant?”

The Mount Vernon mayor and city council members did not have a clear answer.

— News-Telegram newsroom assistant Todd Kleiboer contributed to this article.