United States District Court, D. Maine
ROBERT J. KEACH, solely in his capacity as the trustee for MONTREAL, MAINE & ATLANTIC RAILWAY, LTD., Appellant,
WHEELING & LAKE ERIE RAILWAY COMPANY, Appellee.
ORDER ON BANKRUPTCY APPEAL
LEVY U.S. DISTRICT JUDGE
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.
reasons explained below, I affirm the Bankruptcy Court's
following facts are taken from MMA's Complaint and are
accepted as true for the purposes of this appeal.
and 2003, the debtor, MMA, and four related corporations
(collectively, the “MMA Companies”) 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.
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.
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.
The Second Amendment to the FRA Mortgage
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.
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
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.
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.
The Estate Representative's Complaint and Wheeling's
Motion to Dismiss
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