Wheeling & Lake Erie Ry. Co. v. Keach (In re Montreal, Maine & Atl. Ry., Ltd.)

• Decision Date: 09 April 2020
• Docket Number: No. 19-1894,19-1894
• Citation: 956 F.3d 1
• Parties: IN RE MONTREAL, MAINE & ATLANTIC RAILWAY, LTD., Debtor. Wheeling & Lake Erie Railway Company, Appellant, v. Robert J. Keach, in his capacity as Estate Representative for Montreal, Maine & Atlantic Railway, Ltd., Appellee.
• Court: U.S. Court of Appeals — First Circuit

956 F.3d 1

IN RE MONTREAL, MAINE & ATLANTIC RAILWAY, LTD., Debtor.Wheeling & Lake Erie Railway Company, Appellant,

v.Robert J. Keach, in his capacity as Estate Representative for Montreal, Maine & Atlantic Railway, Ltd., Appellee.

No. 19-1894

United States Court of Appeals, First Circuit.

April 9, 2020

George J. Marcus and Daniel L. Rosenthal, with whom Marcus Clegg, Portland, ME, was on brief, for appellant.

Adam R. Prescott, with whom Robert J. Keach, Letson B. Douglass, and Bernstein, Shur, Sawyer & Nelson, P.A., Portland, ME, were on brief, for appellee.

Before Howard, Chief Judge, Selya and Lynch, Circuit Judges.

SELYA, Circuit Judge.

On the surface, this appeal poses intricate questions concerning such esoteric areas of the law as secured transactions, carriage of goods, and corporate reorganization. Digging deeper, though, the appeal turns on abecedarian principles relating to the allocation of the burden of proof and the deference due to the finder of fact. After application of these principles in light of the record and the decisions of the courts below, we affirm the entry of judgment in favor of appellee Robert J. Keach, the estate representative of Montreal, Maine & Atlantic Railway, Ltd. (MMA), and against creditor-appellant Wheeling & Lake Erie Railway Company (Wheeling).

I. BACKGROUND

This case is a by-product of litigation spawned by the tragic derailment of an MMA freight train carrying crude oil in Lac-Mégantic, Québec. The derailment, coupled with MMA's subsequent bankruptcy filings (both in the United States and in Canada), has led to protracted dueling between Wheeling and Keach.¹ See, e.g., Keach v. Wheeling & Lake Erie Ry. Co. (In re Montreal, Me. & Atl. Ry., Ltd. ), 888 F.3d 1 (1st Cir. 2018) ; Wheeling & Lake Erie Ry. Co. v. Keach (In re Montreal, Me. & Atl. Ry., Ltd. ), 799 F.3d 1 (1st Cir. 2015). We assume the reader's familiarity with these two prior opinions and rehearse only the discrete set of facts needed to place this appeal into a workable perspective.

In June of 2009, Wheeling extended a $6 million line of credit to MMA, evidenced by a promissory note. In connection with this note, MMA executed and delivered a security agreement to Wheeling. The security agreement gave Wheeling an enforceable security interest in MMA's "Accounts and other rights to payment (including Payment Intangibles)," which extended to any non-tort claims accrued by MMA.² Wheeling perfected its security interest by filing a UCC-1 financing statement with the Delaware Secretary of State.

Four years later, Western Petroleum Company and certain corporate affiliates (collectively, the Shipper) arranged for the transport of seventy-two tank cars of crude oil with Canadian Pacific Railway Company (Canadian Pacific). Pursuant to the through bill of lading, Canadian Pacific and its American affiliate transported the oil from its point of origin in New Town, North Dakota, to Québec, Canada, and transferred the shipment to MMA for carriage to its final destination in New Brunswick, Canada.

A noted Scottish poet famously wrote that "[t]he best-laid schemes o' [m]ice an' [m]en [g]ang aft a-gley." Robert Burns, To a Mouse (1785). So it was here: the shipment never reached its destination. On July 6, 2013, the MMA freight train carrying the oil derailed in Lac-Mégantic, Québec, 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, the Shipper, and others involved in arranging and transporting the crude oil shipment. Several victims of the explosions, or family members on their behalf, sought damages for personal injury or wrongful death in state court in Illinois. A group of victims filed a class action lawsuit in Québec on behalf of all residents, property owners, and business owners in Lac-Mégantic affected by the derailment. The government of Québec began administrative proceedings to recover for environmental damage and clean-up costs.

In August of 2013 — one month after the derailment — MMA filed a voluntary petition for protection under Chapter 11 of the Bankruptcy Code, see 11 U.S.C. § 301, as well as an ancillary insolvency proceeding in Québec. Soon thereafter, Wheeling instituted an adversary proceeding in the bankruptcy court against MMA and the estate representative, seeking to protect its rights under the security agreement. Pertinently, Wheeling sought a declaratory judgment regarding the existence and priority of its security interest in certain property of the MMA estate (the estate).

Recognizing the possibility that the estate would face significant liability arising out of the derailment, the estate representative began pursuing litigation against several entities involved in the crude oil shipment with the aim of establishing a fund for the derailment victims. As relevant here, the estate representative commenced an adversary proceeding against the Shipper in January of 2014. His complaint alleged that the Shipper negligently 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. In order to facilitate settlement discussions, the parties agreed that the Shipper would not assert counterclaims against the estate (but the Shipper reserved the right to do so if those discussions failed).

After extensive negotiations, the Shipper and the estate representative reached a settlement. The Shipper agreed to pay $110 million to the monitor in the Canadian bankruptcy case (for the ultimate benefit of the derailment victims), and the Shipper and the estate representative agreed to release all claims and counterclaims against each other arising out of the derailment.

There were other terms as well. For one thing, the Shipper committed to assigning to the estate representative its Carmack Amendment claims against the non-MMA carriers involved in transporting the crude oil.³ For another thing, the settlement was to become effective only upon the confirmation of the proposed plans in both the U.S. and Canadian bankruptcy proceedings (including the entry of orders barring all persons and entities from pursuing derailment-related claims against the Shipper). Striving to achieve global closure, the estate representative executed similar settlement agreements around the same time with many other entities.

When the estate representative presented the settlement agreements and his plan of liquidation to the bankruptcy court for approval and confirmation, Wheeling objected. It complained that the estate representative had agreed to release non-tort claims that the estate possessed against the Shipper as part of the settlement — even though the estate representative had not asserted any such claims in the adversary proceeding — and that those released non-tort claims constituted a part of Wheeling's collateral. Wheeling posited that the bankruptcy court's approval of the settlement and confirmation of the plan would deprive it of compensation for the estate representative's use of its collateral to secure the settlement with the Shipper, despite the fact that the plan classified its secured claim as unimpaired.

Notwithstanding Wheeling's objection, the bankruptcy court approved the settlement agreements and confirmed the estate representative's plan of liquidation. See id. §§ 1129, 1173. To address Wheeling's plaint, Paragraph 84 of the confirmation order stated that neither the order nor the settlement agreements "limit[ed] or affect[ed] Wheeling's ability to contend, and the [estate representative's] ability to contest, that Wheeling's security interest, if any, attaches to the Settlement Payments (whether as original collateral, proceeds, products or otherwise)." The confirmation order contained the injunctions against the prosecution of derailment-related claims necessary to render the settlement agreements effective.

While the estate representative was resolving the main bankruptcy proceeding, he was simultaneously engaged in litigation with Wheeling. After addressing other matters not relevant here, the adversary proceeding between Wheeling and the estate representative reduced to the same issue that prompted Wheeling's objection to confirmation of the plan of liquidation: whether it was entitled to compensation for the release of non-tort claims that the estate possessed against the Shipper. In May of 2018, the bankruptcy court held a two-day bench trial relative to this issue. Wheeling and the estate representative agreed that the following stipulation should become part of the trial record:

1. The derailment of the freight train carrying crude oil on July 6, 2013, in Lac-Mégantic, Quebec (the "Derailment") caused MMA to suffer economic damages as a result of the loss in value of its business, and other economic damages, in an amount no less than $25,000,000.

2. Assuming (without admitting) that such claims existed, the Estate Representative would have incurred legal fees and costs in an amount no less than $825,000 but not greater than an amount that would cause the net economic damages referred to above, after deducting legal fees and costs, to be less than $10,000,000, had he pursued civil breach of contract claims directly against the shipper of the crude oil transported on the freight train involved in the Derailment, including attorneys' fees, litigation costs, expert fees, and the cost of defending against any and all counterclaims.

In a bench decision, the bankruptcy court ruled in favor of the estate representative on two alternative grounds. First, the court 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 claims against the Shipper. Second, the court found that, even if the estate...