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Keach v. Wheeling & Lake Erie Railway Co.

United States District Court, D. Maine

August 14, 2017

ROBERT J. KEACH, solely in his capacity as the trustee for MONTREAL, MAINE & ATLANTIC RAILWAY, LTD., Appellant,



         Robert J. Keach, as the Chapter 11 Trustee (the “Trustee”) for the appellant Montreal, Maine & Atlantic Railway, Ltd. (“MMA”), appeals from an order granting Wheeling & Lake Erie Railway Company's (“Wheeling's”) motion to dismiss MMA's Complaint, entered by the United States Bankruptcy Court for the District of Maine on December 23, 2016. Keach filed a timely notice of appeal pursuant to 28 U.S.C.A. § 158(a)(1) (2017) and Federal Rules of Bankruptcy Procedure 8001(b), 8003(a)(1), and 8005.

         For the reasons explained below, I affirm the Bankruptcy Court's order.


         The following facts are taken from MMA's Complaint and are accepted as true for the purposes of this appeal.

         In 2002 and 2003, the debtor, MMA, and four related corporations (collectively, the “MMA Companies”)[1] entered into a series of financial transactions in which they purchased the assets of several American and Canadian railroad companies. As part of these transactions, MMA executed a Rail Funding Agreement with the State of Maine Department of Transportation and a separate Note and Warrant Purchase Agreement (“NWPA”) with a group of corporate and individual investors (the “Investors”) who invested $15, 000, 000 in the MMA Companies in exchange for certain subordinated notes and warrants. The Investors taking part in the NWPA included ABC Railway, Inc., a wholly-owned subsidiary of Wheeling, and Larry R. Parsons, the Chairman and Chief Executive Officer of Wheeling and a member of the MMA Board of Directors.

         In March 2005, the Federal Railroad Administration (“FRA”) loaned $34, 000, 000 to MMA in exchange for a senior lien on MMA's rail lines and related tracks and improvements. Four years later, in June 2009, Wheeling provided MMA with a line of credit of up to $6 million (the “Wheeling Note”) and entered into a related Security Agreement with MMA.

         In 2010, despite the FRA loan and the influx of credit from Wheeling, MMA was unable to meet all of its financial obligations to its creditors and decided to liquidate some of its rail lines (the “Lines”) and other assets in order to reduce the amount of its debt. This liquidation included a sale of the Lines to the State of Maine.

         A. The Second Amendment to the FRA Mortgage

         In anticipation of the sale to the State of Maine, MMA and the FRA executed a 2010 agreement called the “Loan Workout Agreement and Amendment No. 2 to Financing Agreement, Mortgage, and Security Agreement” (the “Second Amendment”) in which the FRA agreed to provide a limited waiver of its security interest in the Lines so that MMA would be able to convey them free and clear of any liens and encumbrances. See ECF No. 6 at 101.

         The limited waiver is contained in § 3(b) of the Second Amendment, and was made effective “upon the closing of the purchase and sale of the Lines to the State of Maine[.]” Id. at 105. Rather than receive the full proceeds of the sale, the FRA directed that the proceeds go to an escrow agent. Id. The Second Amendment then directed that, “upon perfection of Lender's Replacement Lien on Canadian Assets, ” $2, 372, 934.96 of the sale proceeds be paid to the FRA, representing the sum of its overdue principal and accrued interest. Pl.'s App. at 103. After the payment to the FRA, the Second Amendment directed that the balance of the sale proceeds be distributed in the following order of priority:

Second, to the Investors on Schedule I to that certain Note and Warrant Purchase Agreement, dated January 8, 2003, as amended, in the amount of $13, 862, 165.29 if paid on December 28, 2010, plus $4, 581.36 for each day thereafter, to pay in full debt obligations including principal and interest; Third, to [MMA], in the amount of $1, 082, 685.79, for accounts payable due and owing.
Fourth, the balance to the Wheeling and Lake Erie Railway Company to reduce the outstanding balance on Borrower's line of credit.

ECF No. 6 at 105.

         In January 2011, MMA entered into a Purchase and Sale Agreement with the State of Maine for the sale of five rail lines for $21, 100, 000. After the closing was held, the proceeds from the sale were distributed as directed by the Second Amendment, with the balance of the sale proceeds, $2, 708, 912.20, paid to Wheeling. Several years later, in August 2013, MMA filed a Chapter 11 petition for bankruptcy.

         B. The Estate Representative's Complaint and Wheeling's Motion to Dismiss

         In May 2015, the Trustee filed a one-count complaint against Wheeling alleging that the $2.7 million payment to Wheeling following the 2011 sale of the Lines was a fraudulent transfer under § 5(b) of the Uniform Fraudulent Transfer Act, 14 M.R.S.A. § 3576(2) (2017), which states that:

A transfer made by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made if the transfer was made to an insider for an antecedent debt, the debtor was insolvent at that time and the debtor insider had ...

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