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In re Carol Engen

Summarizing by Bradley Pearce

Keach v. New Brunswick Southern Railway Co. Ltd.

Citation:
Robert Keach, Chapter 11 Trustee v. New Brunswick Southern Railway Co. Ltd et al. (In re Montreal, Maine & Atlantic Railway, Ltd.), BAP No. 16-015 (Oct. 21, 2016)
Tag(s):
Ruling:
The United States Bankruptcy Appellate Panel for the First Circuit affirmed the ruling of the bankruptcy court that certain claims for interline rail services were entitled to priority treatment under Section 1171(b) of the Bankruptcy Code.
Procedural context:
New Brunswick Southern Railway Co. Ltd. ("NBSR") and Maine Northern Railway Co. (MNR") filed proofs of claim in the underlying bankruptcy case for payment owed in connection with certain interline railway services provided to the debtor, Montreal, Maine & Atlantic Railway, Ltd. ("MMA"), seeking priority treatment for so-called "six-month claims" pursuant to Section 1171(b). The chapter 11 trustee (the "Trustee") objected on the basis that the claims at issue did not qualify for priority treatment by law. The bankruptcy court overruled the Trustee's objection and the Trustee appealed that decision to the BAP.
Facts:
NBSR and MNA had provided certain interline rail services to the MMA in connection with the transport of oil shipments in the US and Canada. By agreement among the parties, the parties would make periodic payments based on amounts outstanding to the parties for services each provided to the other for interline transport of shipments. At some point the amounts owed by MMA to NBSR and MNA began to exceed the amounts flowing in the other direction. After a catastrophic derailment led to the bankruptcy filing by MMA, NBSR and MNA filed their claims in the bankruptcy case. Each asserted that some portion of its claim was secured by an equitable lien under the Sixth-Month Rule by federal law and therefore was entitled to priority treatment under Section 1171(b) because the claims: (i) related to current operating expenses incurred by MMA that were necessary for on-going operations; (ii) were incurred within six months of the petition date; and (iii) were for services provided with the expectation that they would be paid out of current operating revenue and not in reliance on the general credit of MMA. The Trustee objected to the claims to the extent the claimants were seeking 1171(b) priority treatment. The Trustee argued that (i) First Circuit law did not afford interline claims priority status under 1171(b) and (ii) the claimants relied on the credit worthiness of the debtor and not on operating revenue as a source of payment for the services and thus fell outside the scope of 1171(b). The BAP, relying on the court's ruling in In re Boston & Maine Corp, 634 F.2d 1359 (1st Cir. 1980) ("Boston &Maine II"),found that interline claims were entitled to priority treatment under 1179(b) if they passed the three part test. There was no real challenge to the timing of the services. The real issues in dispute were the necessity of the services and whether NBSR and MNA expected payment from current operating revenue for payment. The BAP found that the bankruptcy court heard evidence on these issues and found that the claimants had demonstrated that: (i) the services at issue were more than simply mere use of tracks, and thus satisfied this prong of the test and (ii) the services were necessary. Finally, the bankruptcy court heard evidence that the transportation of oil shipments were provided with the expectation that they would be paid from current operating revenue and not in reliance on the debtor's creditworthiness according to the test articulated in Boston & Maine II. Accordingly, the BAP affirmed the bankruptcy court in finding that the claims qualified as six-month payments under 1171(b) and therefore overruling the Trustee's claim objection.
Judge(s):
Judge Joan N. Feeney, Judge Bruce Harwood and Judge Michael Deasy

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