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Wheeling & Lake Erie Railway Co. v. Keach

United States District Court, D. Maine

June 18, 2019

WHEELING & LAKE ERIE RAILWAY CO., Appellant,
v.
ROBERT J. KEACH, solely in his capacity as the Estate Representative for MONTREAL MAINE & ATLANTIC RAILWAY, LTD., Appellee.

          ORDER ON BANKRUPTCY APPEAL

          JON D. LEVY, CHIEF U.S. DISTRICT JUDGE

         Wheeling & Lake Erie Railway Co. (“Wheeling”) appeals from the Bankruptcy Court's judgment in favor of the Estate Representative for Montreal Maine & Atlantic Railway Ltd. (the “Estate Representative” for “MMA”). For the reasons that follow, I AFFIRM the judgment.

         I. BACKGROUND

         This case arises out of the derailment of Train 282 in Lac-Mégantic, Canada, on July 6, 2013. Four years before the derailment, Wheeling extended a line of credit to MMA in the amount of $6, 000, 000, which was secured by a valid, perfected, and enforceable security interest. Wheeling's security interest encumbered all contractual and statutory payment rights, i.e., all non-tort payment rights.

         On June 29, 2013, Western Petroleum Company and its corporate affiliates, World Fuel Services Corporation and World Fuel Services, Inc. (collectively, the “Shipper”), arranged to ship crude oil by rail with Canadian Pacific Railway Company (together with its American operating affiliate Soo Line Railroad Company, “CP”) and MMA from New Town, North Dakota, to Saint John, New Brunswick in Canada. The crude oil was to be transported in 72 tank cars (“Train 282”) originating in North Dakota on the Soo Line, transferring to CP in Windsor, Ontario, connecting to MMA's lines in Quebec, and finally transferring to the New Brunswick Southern Railway for travel to its ultimate destination. In the chain of transportation, CP was the originating carrier and MMA was a connecting carrier.

         The transport of Train 282 was governed by a bill of lading (the “BOL”), which was created by the Shipper logging onto CP's online bill of lading system, filling in the required information, and electronically signing. The BOL contained a section titled “Route” where the Shipper listed both “CPRS” (referring to CP and Soo Line) and “MMA.” This is the only place in the BOL in which MMA is identified. The BOL was a “through” bill of lading, which is one that specifies multiple carriers moving cargo from the origination point to the final destination in a single document. See Kawasaki Kisen Kaisha Ltd. v. Regal-Beloit Corp., 561 U.S. 89, 93-94 (2010).

         On July 6, 2013, Train 282 derailed and exploded in the town of Lac-Mégantic, causing catastrophic damage to the town and claiming 47 lives. Testing later revealed that the crude oil it was transporting had a dangerously low flash point and high volatility. Although the crude oil should have been labeled as a Packing Group I or II hazardous substance, indicating that it was a more dangerous and explosive crude oil, the Shipper instead labeled it as Packing Group III, the least hazardous category of crude oil.

         As a result of the loss of life, the property damage, and the damage to MMA's assets and business caused by the derailment, MMA filed a Chapter 11 bankruptcy petition on August 6, 2013, in the United States Bankruptcy Court for the District of Maine. MMA also filed an affiliated insolvency proceeding in the Superior Court for the Province of Quebec, Canada.

         In the U.S. bankruptcy case, the Estate Representative for MMA sued the Shipper, asserting that the Shipper's mislabeling of the crude oil on Train 282 caused MMA to fail to take certain precautions which led to the derailment, and that the Shipper was liable for the damage caused to MMA and others by the derailment. The Estate Representative alleged that the derailment led to numerous litigation claims caused by the Shipper, with damages estimated “in the hundreds of millions of dollars, and potentially in excess of a billion dollars.” ECF No. 31 at 24. Wheeling and the Estate Representative have stipulated in this proceeding that the net economic damage suffered specifically by MMA in the derailment was at least $10, 000, 000. That stipulation, which is at the heart of the issues presented, reads, in relevant part:

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.

ECF No. 31 at 24-25.

         The Estate Representative, the Shipper, and other parties with claims arising from the derailment agreed to settle the claims against the Shipper and memorialized that agreement in a Plan Support and Settlement Agreement (the “Comprehensive Settlement”). Under the Comprehensive Settlement, the Estate Representative agreed to release all claims that MMA had against the Shipper. In addition to the Estate Representative's release of MMA's claims, the Comprehensive Settlement also contemplated that all of the other parties would also release their claims against the Shipper. In exchange for the Estate Representative's release of MMA's claims and similar releases from all other parties, the Shipper agreed to pay a total of $110, 000, 000. In addition, the Shipper agreed to release any and all counterclaims that it might have had against MMA. The settlement proceeds were to be paid by the Shipper to the Monitor in the Canadian bankruptcy case, who agreed to distribute them to third parties who may hold derailment claims against MMA.

         When the Estate Representative sought confirmation of the Comprehensive Settlement, Wheeling objected, arguing that the claims released by the Estate Representative under the Comprehensive Settlement were Wheeling's collateral and, as such, Wheeling was entitled to “adequate protection, ” pursuant to 11 U.S.C.A. § 363(e) (West 2019), before its collateral could be released as part of the settlement. The Bankruptcy Court confirmed the Comprehensive Settlement while preserving Wheeling's rights to adequate protection.

         After confirming the Comprehensive Settlement, the Bankruptcy Court held a bench trial to determine the nature and value of MMA's claims against the Shipper. At the conclusion of the trial, the court ruled in favor of the Estate Representative and against Wheeling, concluding that: (1) MMA's derailment claims against the Shipper that were released and discharged were not contract, statutory or regulatory claims and therefore were not Wheeling's collateral; and (2) even if the claims were Wheeling's collateral, Wheeling had failed to prove that the collateral had any “net value.” Wheeling appeals from that decision.

         For reasons I will explain, I conclude that the Bankruptcy Court erred in determining that MMA did not have regulatory and contractual claims against the Shipper that constituted Wheeling's collateral, but I also conclude that the Bankruptcy Court did not err in finding that the collateral had no value. To prevail on its appeal, Wheeling must show error on both issues. Accordingly, I affirm the judgment in favor of the Estate Representative.

         II. LEGAL STANDARD

         Federal district courts have jurisdiction over appeals from final judgments, orders, and decrees of the bankruptcy courts. 28 U.S.C.A. § 158(a)(1) (West 2019). “On intermediate appeal to a district court, a final order of the bankruptcy court is subject to the same familiar standards of review normally employed in direct appeals to the courts of appeals in civil cases generally.” In re LaRoche, 969 F.2d 1299, 1301 (1st Cir. 1992). The district court reviews the bankruptcy court's conclusions of law de novo and any factual findings under the more deferential clearly erroneous standard. See Tamir v. United States Tr., 566 B.R. 278, 281 (D. Me. 2016); Davis v. Cox, 356 F.3d 76, 82 (1st Cir. 2004).

         III. ANALYSIS

         This appeal raises two central issues: (A) Did MMA have contractual and regulatory claims, as opposed to tort claims, arising from the derailment of Train 282 that constituted Wheeling's collateral; and (B) if MMA did have such claims, did Wheeling meet its burden to prove that those claims had value? The Bankruptcy Court ruled that no claims existed and that even if any such claims did exist, Wheeling had failed to prove their value. See ECF No. 7 at 19-24. Thus, the court concluded that Wheeling was not entitled to compensation for the Estate Representative's release of MMA's claims against the Shipper as part of the Comprehensive Settlement. Id. at 23-24. I address each issue in turn.

         A. The Existence of Wheeling's Collateral

         The parties do not dispute that the Shipper mislabeled the crude oil carried by Train 282. The BOL, which the Shipper created, identified the oil as Packing Group III, the least hazardous category of crude oil. But post-derailment tests showed that the crude oil had a dangerously low flash point and was highly volatile, and therefore should have been labeled as a Packing Group I or II hazardous substance- classifications indicating a more dangerous, volatile, and explosive cargo. Wheeling argues that this mislabeling of the oil provided MMA with both regulatory and contractual claims for damages against the Shipper that were released by the Comprehensive Settlement entered into by the Estate Representative.

         According to Wheeling, MMA's alleged regulatory claims arise from an indemnification provision in the Uniform Bill of Lading (“Uniform BOL, ” see 49 C.F.R. § Pt. 1035, App. A, B (West 2019)). Specifically, Wheeling contends that the Shipper's duty to indemnify arose because the Shipper failed to disclose that the crude oil to be transported was dangerous or explosive. The indemnification provision of the Uniform BOL states:

Every party, whether principal or agent, shipping explosives or dangerous goods, without previous full written disclosure to the carrier of their nature, shall be liable for and indemnify the carrier against all loss or damage caused by such goods, and such goods may be warehoused at owner's risk and expense or destroyed without compensation.

49 C.F.R. § Pt. 1035, App. B, Sec. 6. By mislabeling the crude oil, Wheeling contends, the Shipper failed to provide “full written disclosure” of the cargo's nature and therefore was obligated to indemnify MMA against the loss resulting from the derailment.

         Wheeling also contends that MMA had contractual claims arising from an indemnification provision in CP's tariffs, which, Wheeling argues, the Shipper agreed to when it signed the BOL. For ...


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