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In re Montreal, Maine & Atlantic Railway, Ltd.

United States Court of Appeals, First Circuit

April 18, 2018

WHEELING & LAKE ERIE RAILWAY COMPANY, Appellee. ROBERT J. KEACH, solely in his capacity as the Chapter 11 trustee for MONTREAL, MAINE & ATLANTIC RAILWAY, LTD., Appellant,

          APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MAINE Hon. Jon D. Levy, U.S. District Judge, Hon. Peter G. Cary, U.S. Bankruptcy Judge

          Robert J. Keach, with whom Lindsay K.Z. Milne, Roma N. Desai, and Bernstein, Shur, Sawyer & Nelson, P.A. were on brief, for appellant.

          George J. Marcus, with whom David C. Johnson, Andrew C. Helman, and Marcus, Clegg & Mistretta, P.A. were on brief, for appellee.

          Before Thompson, Circuit Judge, Souter, [*] Associate Justice, and Selya, Circuit Judge.

          SELYA, Circuit Judge.

         This appeal requires us to explore the labyrinth of high-stakes bankruptcy law to determine whether the proceeds of a multi-million-dollar sale of certain railroad lines constituted property of the bankruptcy estate. Although we are skeptical of the rationale employed by the courts below and thread our way through this maze along a different ratiocinative path, we arrive at the same place: we conclude that the disputed funds were not property of the bankruptcy estate. Consequently, we affirm the dismissal of the complaint.

         I. BACKGROUND

         Because this appeal challenges an order of dismissal for failure to state an actionable claim, we take the facts from the well-pleaded averments contained in the complaint, supplemented from other permissible sources. See Banco Santander de P.R. v. Lopez-Stubbe (In re Colonial Mortg. Bankers Corp.), 324 F.3d 12, 15-16 (1st Cir. 2003). In carrying out this task, we assume the reader's familiarity with our opinion in earlier litigation involving the same parties. See Wheeling & Lake Erie Ry. v. Keach (In re Montreal, Me. & Atl. Ry.) (MMA I), 799 F.3d 1, 3-4 (1st Cir. 2015).

         In 2002, Montreal, Maine & Atlantic Railway, Ltd. (the debtor) and a group of related entities purchased the assets of several United States and Canadian railways. On January 8, 2003, a consortium of investors (the 2003 Investors) provided $15, 000, 000 to the purchasers in return for a series of subordinated notes and warrants. Despite this infusion of cash, the debtor soon found itself strapped and procured a $34, 000, 000 loan from the Federal Railroad Administration (the FRA). As part of this transaction, the FRA obtained a senior lien on all of the debtor's rail lines and related improvements in the United States. Several years later, the appellee, Wheeling & Lake Erie Railway Company (Wheeling), furnished a $6, 000, 000 line of credit to the debtor - a transaction memorialized by a promissory note dated June 15, 2009 and a security agreement.

         Notwithstanding these efforts, the debtor struggled to meet its financial obligations. By late 2010, it owed $906, 579.38 in overdue principal and $1, 466, 355.58 in accrued interest to the FRA. To obtain needed funds, the debtor proposed to sell approximately 233 miles of track located in northern Maine (the Lines) to the State of Maine. In order to make this transaction feasible, the debtor enlisted FRA's cooperation and, on December 29, 2010, it agreed with the FRA to amend the existing loan agreement.

         This amendment, which we shall call the Second Amendment, lies at the epicenter of this litigation. Under Section 3.b, the FRA agreed to provide "a limited waiver" of its senior lien over the Lines, which would take effect "upon the closing" of the proposed sale to the State of Maine. In exchange, the FRA received a replacement lien on certain of the debtor's property in Canada.

         As relevant here, the FRA conditioned its "limited waiver" of its senior lien on the debtor's compliance with a series of conditions spelled out in Section 3.b.ii of the Second Amendment. The FRA concluded that these conditions and the concomitant amendments to the parties' prior agreement were "equitable and in the overall best interest of the United States" in accordance with 45 U.S.C. § 823.

         Pertinently, the Second Amendment required the debtor, upon the closing of the sale, to convey the proceeds to an escrow agent. Once the FRA's replacement lien on the Canadian property had been perfected, the debtor was to pay the FRA roughly $2, 400, 000 of the sale proceeds (representing the sum of the FRA's overdue principal and accrued interest), pay roughly $14, 000, 000 to the 2003 Investors, reserve roughly $1, 000, 000 to defray certain accounts payable, and distribute the remainder of the proceeds to Wheeling to reduce the debtor's outstanding balance under the 2009 credit agreement.

         The record contains few details as to how the parties shaped the contours of this waterfall of disbursements. In this regard, though, the complaint does allege that the 2003 Investors "demanded full payment as a condition to allowing the transaction to occur." The complaint also alleges an overlap between the leadership of Wheeling and the leadership of the debtor. It offers several examples of this perceived overlap, such as the fact that Larry R. Parsons was the principal owner of Wheeling and served as a board member of the debtor and the fact that ABC Railway (a wholly owned subsidiary of Wheeling) was a shareholder of the debtor's parent company.

         On January 4, 2011, the State of Maine agreed to pay approximately $21, 000, 000 for the Lines (of which approximately $1, 000, 000 was to be retained by Maine and applied to other debt owed to Maine). The debtor distributed the proceeds in accordance with the waterfall provision of the Second Amendment, with the result that Wheeling received $2, 708, 912.20 (which was applied to pay down the debtor's outstanding line of credit). Despite this effort to stanch the flow of red ink, the debtor's financial woes persisted and, in mid-2013, it filed a voluntary petition for protection under Chapter 11 of the Bankruptcy Code. See 11 U.S.C. § 301. The bankruptcy court appointed the appellant, Robert J. Keach, as the Chapter 11 trustee (the Trustee).[1]

         On May 26, 2015, the Trustee instituted an adversary proceeding against Wheeling, seeking to avoid the waterfall disbursement made to it as constructively fraudulent under section 5(b) of Maine's Uniform Fraudulent Transfer Act (UFTA), which proscribes certain conveyances by an insolvent debtor to an "insider." See id. § 544(b); 14 M.R.S.A. § 3576(2). Wheeling moved to dismiss the Trustee's complaint pursuant to Rule 7012 of the Federal Rules of Bankruptcy Procedure. It argued that the waterfall disbursements did not consist of "assets" belonging to the debtor and, in the alternative, that the Trustee had failed plausibly to allege that Wheeling was an "insider" vis-à-vis the debtor. Accepting Wheeling's first argument, the bankruptcy court dismissed the complaint with prejudice for failure to state an actionable claim. It reasoned that because the waterfall disbursements were part of a single transaction, all aspects of which should be deemed to have occurred simultaneously, they remained encumbered by the FRA's lien up to and until the time of disbursement (and, therefore, did not comprise property belonging to the debtor). The bankruptcy court did not reach Wheeling's alternative ground for dismissal.

         The Trustee appealed to the federal district court, which affirmed on substantially similar reasoning. See Keach v. Wheeling & Lake Erie Ry. (In re Montreal, Me. & Atl. Ry.) (MMA II), No. 1:17-CV-00012, 2017 WL 3485560, at *4-5 (D. Me. Aug. 14, 2017). This timely second-tier appeal followed.

          II. ANALYSIS

         Congress has established a two-tiered framework for appellate review in bankruptcy cases. See MMA I, 799 F.3d at 4-5; City Sanitation, LLC v. Allied Waste Servs. of Mass., LLC (In re Am. Cartage, Inc.), 656 F.3d 82, 87 (1st Cir. 2011). A litigant ordinarily may take a first-tier appeal either to the bankruptcy appellate panel or to the district court. See 28 U.S.C. § 158(a)-(b). No matter which route is pursued for a first-tier appeal, further review is available in the court of appeals. See MMA I, 799 F.3d at 5. In such second-tier proceedings, no particular deference is afforded to the ...

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