Keach v. New Brunswick S. Ry. Co. (In re Montreal, Maine & Atlantic Ry., Ltd.)
| Citation | 558 B.R. 473 |
| Decision Date | 21 October 2016 |
| Docket Number | BAP NO. EB 16-015,Bankruptcy Case No. 13-10670-PGC |
| Court | Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, First Circuit |
| Parties | Montreal, Maine & Atlantic Railway, Ltd., Debtor. Robert J. Keach, Chapter 11 Trustee, Appellant, v. New Brunswick Southern Railway Company Limited and Maine Northern Railway Company, Appellees. |
Robert J. Keach, Esq., and Lindsay K. Zahradka, Esq., on brief for Appellant.
Alan R. Lepene, Esq., and Keith J. Cunningham, Esq., on brief for Appellees.
Before Feeney, Deasy, and Harwood, United States Bankruptcy Appellate Panel Judges.
Robert J. Keach, the former chapter 11 trustee (the “Appellant”),1 appeals the bankruptcy court's February 26, 2016 order (the “Order”) overruling in part his objections to certain proofs of claim filed by New Brunswick Southern Railway Company Limited (“NBSR”) and Maine Northern Railway Company (“MNR” and, collectively with NBSR, the “Irving Railroads”). The Appellant appeals the bankruptcy court's ruling that the Irving Railroads' claims qualified as so-called “six months claims” entitled to priority under § 1171(b).2 For the reasons set forth below, we AFFIRM .
From January 2003 until May 2014, Montreal, Maine & Atlantic Railway, Ltd. (“MMA”) owned and operated an integrated, international shortline freight railroad system with its wholly owned Canadian subsidiary, Montreal, Maine & Atlantic Canada Co.3 This railroad system included 510 route miles of track in Maine, Vermont, and Québec, and was a substantial component of the rail transportation systems in northern Maine, northern New England, Québec, and New Brunswick. Among other things, it provided the shortest rail transportation route between Maine and Montréal, and was a “critical rail artery” between St. John, New Brunswick and Montréal. In order to provide freight transportation services to customers throughout the system, MMA interchanged freight traffic with other railroads, including the Irving Railroads, with which its operations were interconnected.
MMA, like most railroads, participated in the Interline Settlement System (the “ISS”). The ISS provides a central clearing house for all participating railroads involved in the interchange of freight traffic among multiple rail carriers to settle accounts receivable and accounts payable arising from the interchange of such traffic. Railroads participating in the ISS that originate traffic are known as “billing” or “originating” railroads and invoice the customer for all freight charges from the point of origin to the point of destination, even if the shipment is interchanged with other railroads along the route. The customer is responsible for paying the billing railroad the entire invoice, and the billing railroad is responsible for paying the other railroads involved in the shipment along the line for their share of the freight charges. Railroads participating in the ISS calculate on a monthly basis the accounts receivable and accounts payable arising from the interchange of traffic that are due and owing to each participant, and the payment of the net amount due and owing is made on the second business day of each month. One of the benefits of participating in the ISS is that billing railroads are obligated to pay the other participating railroads regardless of whether the customer pays the billing railroad.
The business relationship between MMA and the Irving Railroads began in January 2003, when MMA entered into a Commercial Agreement (the “Commercial Agreement”) with NBSR and one of NBSR's affiliates, Eastern Maine Railway Company (“EMR”),4 setting forth various terms and conditions governing the interchange of freight traffic between MMA and the Irving Railroads. Pursuant to the Commercial Agreement and a separate Interchange Agreement between MMA and EMR, the Irving Railroads and MMA agreed to interchange freight traffic at MMA's Brownville Junction Yard in Maine. Section 2 of the Commercial Agreement, entitled “Performance of Transportation Services,” provided as follows:
The parties agree that from and after the Effective Date, EMR/NBS[R] shall move loaded freight cars and associated empty cars between points located on its lines or reached by it under Canadian interswitch rules and Brownville Junction at rates as set out in this Agreement. MMA shall act as the interline tariff carrier on a junction settlement basis. By “junction settlement basis” the parties mean that MMA shall negotiate through rates and make contracts and provide quotations, and shall be responsible for car supply to the extent requested by NBS[R] and reasonably available from MMA and in rail cars customarily supplied by railroad carries, all in accordance with the provisions of this Agreement. MMA shall continue to render one freight bill, and assess and collect the total amount of freight charges ... and remit the portion pertaining to EMR/NBS[R's] transportation services to EMR/NBS[R] in accordance with the procedures in this Agreement.
At the evidentiary hearing described below, and while addressing the freight carried by MMA to the interchange point with the Irving Railroads, Ian Simpson, general manager of the Irving Railroads, explained that the interchange of freight traffic involved the decoupling of freight cars from MMA's locomotives and connecting them to the Irving Railroads' locomotives, which then carried the freight cars to their final destination.
The Irving Railroads did not participate in the ISS.5 As a result, pursuant to the Commercial Agreement, MMA acted as the billing railroad when either of the Irving Railroads originated traffic and interchanged with MMA, as well as when MMA originated traffic and interchanged with either of the Irving Railroads. MMA also collected from the ISS freight revenue attributable to freight services provided by the Irving Railroads in connection with shipments originated by other carriers that were interchanged by such carriers with MMA and then by MMA with the Irving Railroads. Periodically, MMA and the Irving Railroads settled their accounts payable and receivable as between themselves. Other than certain amounts for repair of cars owned or leased by MMA, the Irving Railroads' claims, as described below, arose from MMA's collection of funds either from customers or through the ISS and its failure to pay amounts due to the Irving Railroads.
At the time MMA and the Irving Railroads began doing business, Karl Hansen, general manager of Corporate Credit and Finance for the Irving Railroads and their affiliated companies, had concerns MMA would not be able to pay the Irving Railroads due to the troubled history of MMA's predecessor, Bangor & Aroostook. As a result, the Irving Railroads, together with certain of their affiliated paper companies, Irving Pulp and Paper, Limited, Irving Paper Limited, and J.D. Irving, Limited (collectively, the “Irving Paper Companies”), which were among MMA's largest customers, agreed with MMA on a process to settle their respective accounts receivable and accounts payable by concurrently exchanging payments through wire transfers of amounts owed to each other. Included in this “payment swap” arrangement6 were: (1) accounts payable owed by the Irving Paper Companies to MMA for freight services provided by MMA to the Irving Paper Companies; (2) accounts payable owed to MMA by the Irving Railroads for interline freight services provided by MMA; and (3) accounts receivable owed by MMA to the Irving Railroads for interline freight services provided by them. Under this arrangement, the parties would determine, based upon the payment terms in effect between them, the amounts due from the Irving Railroads and the Irving Paper Companies to MMA, and the amounts due from MMA to the Irving Railroads, and then concurrently exchange cash payments in the agreed upon amounts. Initially, the amounts owed to MMA by the Irving Railroads and the Irving Paper Companies each week greatly exceeded the amounts owed by MMA to the Irving Railroads. Mr. Hansen explained the reason for entering into this arrangement as follows: “I was determined that I was not going to take a credit risk, I was not relying on their credit to [e]nsure we got paid.”
The payment swap arrangement worked well until the volume of crude oil shipments carried by MMA and interchanged with the Irving Railroads for delivery to refineries in St. John, New Brunswick began to increase significantly in 2012. In the two years leading up to the bankruptcy filing, MMA benefited from the increased use of trains to move oil from the central and western regions of the United States to refineries in the east. United States and Canadian oil drillers were producing oil faster than the new pipelines could be built, and trains were needed to transport crude oil to refineries. During this time, MMA was hauling 500,000 barrels of oil monthly through Québec and Maine. For the majority of such oil shipments, the originating railroad was Canadian Pacific Railway Company and its affiliates (“CP”), which participated in the ISS. CP was the first railroad to haul the oil, and the shipment would then travel across the country over a number of railway lines until it eventually interchanged with MMA. MMA would haul the oil over its lines and then interchange the freight with the Irving Railroads, which delivered the oil to its final destination at the Irving Oil refinery in St. John, New Brunswick.7
The payments for the oil shipments were processed through the ISS. Because the Irving Railroads were not members of the ISS, they could not collect from the ISS for their share of freight interline charges. Rather, the ISS paid MMA, and MMA paid the Irving Railroads pursuant to the terms of their payment arrangement.
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