Wheeling and Lake Erie Ry. Co. v. Keach

The value of a disputed claim is proven by showing the likely validity of the claim and the likelihood of recovery, not just by establishing the possible damages.

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Case Type:
Case Status:
19-1894 (1st Circuit, Apr 09,2020) Published
The First Circuit affirmed the district court judgment giving due deference to the factfinder's resolution of the burden of proof issue.
Procedural context:
In Appeals from the bankruptcy court, the Court of Appeals accords no particular deference to the determinations of made by the district court but focus exclusively on the bankruptcy court's determinations. It reviews the bankruptcy court's findings of fact for clear error and its legal conclusions de novo. For the purpose of the Appeal, the Court assumed that the estate did possess non-tort claims against the Shipper and that those claims constituted part of Wheeling's collateral. Wheeling must show that the bankruptcy court erred in finding both that the estate did not posses any non-tort claims and that Wheeling failed to prove the value of those claims. Wheeling bore the burden of demonstrating the value of the released claims under section 506(a)(1) by a preponderance of the evidence. the Court of Appeals concluded that Wheeling's reliance on the stipulation of the net settlement value did not satisfy its burden of proof. It considered that by offering evidence of the claims' settlement value Wheeling could have satisfied its burden, and that expert testimony should have been presented to establish the amount. Since the bankruptcy court applied Wheeling's proposed valuation standard in fashioning the finding, the Court of Appeals reviewed that finding (that Wheeling failed to present sufficient evidence to carry its burden) for clear error. The Court concluded that Wheeling's contention relied on the erroneous premise that the value of a claim is the amount of damages suffered by the claimant, net of prosecution costs. But, the settlement value of a claim is the amount that the claimant would recover if he prevails in litigating the claim multiplied by the probability of recovery. And, the probability of recovery depends on several other factors such as the strength of the claimant's evidence, the viability of the defenses, and the ability of the defendant to satisfy a judgment. The Court concluded that Wheeling offered no evidence that would have allowed the bankruptcy court either to assess this likelihood or to gauge any of the relevant factors other than the estate's potential recovery that may have affected the settlement value of the non-tort claims. Therefore, the bankruptcy court did not err in holding that Wheeling failed to carry its burden of offering some probative evidence, over and beyond the stipulation, showing the settlement value of the non-tort claims.
In June 2009, Wheeling & Lake Erie Railway Company (Wheeling) extended a $6 million line of credit to Maine & Atlantic Railway, Ltd. (MMA). MMA executed and delivered a security agreement including "accounts and other rights to payment (including intangibles)," which extended to any non-tort claims accrued by MMA. In 2013 Western Petroleum Company and certain affiliates (the Shipper) arranged for the transport of 72 tank cars of crude oil with Canadian Pacific Railway Company and its affiliates from New Town, North Dakota to Quebec, Canada, and transferred the shipment to MMA for carriage to its final destination in New Brunswick, Canada. The shipment never reached its destination, as the MMA freight train carrying the oil derailed in Lac- Megantic, Quebec, sparking massive explosions that destroyed part of the town and killed nearly fifty people. The derailment triggered a frenzy of litigation in U.S. and Canadian courts against MMA. a month after the derailment MMA filed for protection under Chapter 11, as well as ancillary insolvency proceeding in Canada. Wheeling filed an adversary proceeding against MMA and its estate representative seeking to protect its rights under the security agreement. The Estate Representative simultaneously began litigation against several entities involved in the crude oil shipment alleging that the Shipper mislabeled the crude oil as less volatile than it actually was, causing MMA not to take the necessary precautions for handling a hazardous shipment. The complaint did not allege any contract or regulatory claims against the shipper. The Shipper and the Estate reached a settlement where the Shipper agreed to pay $110 Million, and the parties agreed to release all claims and counterclaims against each other arising out of the derailment. The Shipper also committed to assigning to the estate representative its Carmack Amendment claims against the non-MMA carries involved in the transporting the crude oil. The settlement was to become effective only upon the confirmation of the proposed plan in both U.S. and Canadian bankruptcy proceedings. Wheeling objected to the plan of liquidation including the settlement when the estate representative presented them to the bankruptcy court. The objection argued that the estate representative released non-tort claims against the Shipper, even though the estate had not asserted any such claims in the litigation, and that those released non-tort claims constituted a part of Wheeling’s collateral. Wheeling posited that confirmation of the plan would deprive it of compensation from the use of its collateral to secure the settlement with the Shipper, although the plan classified Wheeling as unimpaired. Notwithstanding Wheeling's objection, the bankruptcy court approved the settlement and confirmed the plan . The court moved on with the adversary proceeding between Wheeling and the estate representative and reduced the issues to whether Wheeling was entitled to compensation for the release of the non-tort claims that the estate might possess against the Shipper. The parties agreed on two stipulations of facts to become part of the two- day bench trial record: the derailment caused MMA to suffer economic damages of no less than $25 million; and, assuming that the non-tort claims existed, the estate representative would have incurred in legal fees and cost that would cause the net economic damages to be less than 10 million after deducting the costs of litigation. The Bankruptcy Court ruled in favor of the estate representative on two alternative grounds. It held that the estate representative did not use Wheeling's collateral when he agreed to a release as part of the settlement agreement because the estate did not have any cognizable non-tort claim against the Shipper. And, even if the estate possessed such claims, Wheeling had not carried its burden of proving their value. On Appeal, the District Court determined that the estate did have non-tort claims against the Shipper, but the Bankruptcy Court was correct in concluding that Wheeling had not proven that those claims have any value. .
Howard, Salya and Lynch

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