Keach v. New Brunswicl S. Rwy. Co. Ltd.

Case Type:
Case Status:
19-1161 (1st Circuit, Mar 10,2020) Published
11 U.S.C. § 1171(b) is substantially the same as section 205(b) of the prior Bankruptcy Act. Accordingly, the decision of the First Circuit in In re Boston Maine Corp., 634 F.2d 1359 (1st Cir. 1980), applies to the facts in the present case. Section 1171(b) incorporates the "Six Month Rule" for priority claims against railroads. Thus, the bankruptcy court correctly determined that the creditor railroads' claims were entitled to priority.
Procedural context:
The bankruptcy trustee for the debtor railroad objected to creditor railroads' assertions that their claims were entitled to priority under 11 U.S.C. § 1171(b) and argued that the claims should be treated as general, unsecured claims. The bankruptcy court ruled that the claims were entitled to priority. The trustee appealed, and the BAP affirmed. The trustee moved for reconsideration by the bankruptcy court, which denied the motion. The parties then jointly requested permission to appeal both orders (the original order and the order denying reconsideration) directly to the First Circuit. The Court of Appeals allowed the appeal.
In 2013, the Montreal Maine & Atlantic Railway Ltd ("MMA") filed a bankruptcy petition in Maine. A dispute arose whether certain claims filed by creditor railroads, to recover their share of payments that MMA was to collect for charges that MMA had billed to customers for freight shipped on routes that spanned the MMA the creditor railroads, were entitled to priority. The creditor railroads (the "Irving Railroads") and MMA each used their own locomotives and tracks to haul freight on routes that spanned the interconnected rail systems. To coordinate payments, The Irving Railroads and MMA participated in the Interline Settlement System (the "ISS"), which is a centralized clearinghouse that many railroads across the country use to process payments for the charges made to customers that ship freight between interconnected rail systems. Unlike MMA, the Irving Railroads did not participate in the ISS. Consequently, MMA and the Irving Railroads were parties to a so-called "swap" arrangement dated back to 2003. Complicating the relationship between MMA and the Irving Railroads was the fact that several of the Irving Railroads' affiliates (the "Irving Paper Companies") were significant customers that shipped freight through the interconnected routes. In practice, the payments that the Irving Paper Companies owed the MMA usually dwarfed the share of the payments that the MMA owed to the Irving Railroads for customers' use of their rail systems. The agreement that the parties hammered out appeared to serve them well until 2012. MMA and the Irving Railroads began hauling a significant volume of crude oil to refineries in St. John, New Brunswick, across their interconnected rail systems. That upended the ordinary course of affairs between the companies by making the Irving entities net creditors of MMA,. In addition, because MMA was receiving payment for crude oil shipments via the ISS, and the time for receiving payment under the ISS was longer than the time for MMA to pay the Irving Railroads under the swap arrangement, MMA and the Irving Railroads modified the swap arrangement in July 2012 so that MMA would not be in default for late payments if the result of the late payment resulted from payments received by MMA under the ISS. Otherwise, MMA generally had to pay the Irving Railroads under the time limits of the original swap arrangement. In July 2013, an MMA train hauling 72 cars filled with crude oil derailed in Lac-Mégantic, Québec. The derailment led to several explosions, killed 47 people, caused severe property damage, and required a major environmental response effort. MMA filed a chapter 11 petition with the bankruptcy court in Maine and the Irving Railroads filed their claims.
Torruella, Thompson, and Barron

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