100th Anniversary History—The First Circuit
The members of the NCBJ have contributed many, many decisions which have framed the bankruptcy jurisprudence throughout the last 100 years. In re Montreal, Maine & Atlantic Railway, Ltd., the First Circuit helped define the issue of whether Article 9 of the Uniform Commercial Code governs the taking and perfection of a security interest in the right to payment under an insurance policy. In its holding, the First Circuit (Judge Selya, deceased) affirmed the First Circuit BAP (Judge Harwood, ret.) which affirmed the Bankruptcy Court for the District of Maine (Judge Kornreich, ret.). Watch for future articles from other Circuits as we celebrate our last 100 years.
In Re Montreal, Maine & Atlantic Railway, Ltd., 799 F. 3d 1 (First Cir. 2015).
The largest bankruptcy case filed in the United States Bankruptcy Court for the District of Maine was In Re Montreal Maine & Atlantic Railway Ltd., Case No.: 13-10670 (Bankr. D. Me. 2013). The case arose from the catastrophic 2013 derailment of an eastbound Montreal, Maine & Atlantic Railway (“MMA”) train with 72 carloads of crude oil in Lac-Mégantic, Québec. It was one of the worst railroad disasters in Canadian history. Several massive explosions destroyed most of downtown Lac-Mégantic and killed 47 people. Crude oil was released into the environment, contaminating the surrounding land and waterways. Not surprisingly, litigation ensued in both the United States and Canada, including the chapters 11 and 15 bankruptcy cases in Maine, insolvency proceedings and other civil cases in Quebec, and Carmack Amendment litigation in North Dakota federal court. One case of particular note is In Re Montreal, Maine & Atlantic Railway, Ltd., 799 F. 3d 1 (1st Cir. 2015).
In 2009, Wheeling & Lake Erie Railway Company (“Wheeling”) extended a $6,000,000 line of credit to Montreal, Maine and Atlantic Railway, Ltd. (“MMA”) and its affiliates. MMA executed and delivered a security agreement to Wheeling to secure MMA’s obligation to Wheeling under the line of credit.[1] Wheeling filed a UCC-1 financing statement with the Delaware Secretary of State but took no other steps to perfect an interest in any insurance policies of MMA. Subsequently, Travelers Property Casualty Company of America (“Travelers”) issued a commercial insurance policy to MMA with $7,500,000 of coverage, including business interruption protection. After the derailment, MMA filed a claim under the Travelers’ policy for lost business income. They eventually agreed that Travelers would pay $3,800,000 to MMA as satisfaction of all claims under the Travelers policy. Wheeling, which was owed the full $6,000,000 under the line of credit, filed an adversary proceeding against MMA, Travelers, and MMA’s chapter 11 trustee seeking a declaration that it had a first-priority security agreement in MMA’s right to payment under the Travelers’ policy. The Maine bankruptcy court disagreed and concluded that MMA was entitled to $3,800,000 free and clear of Wheeling’s asserted interest. The bankruptcy appellate panel and the First Circuit agreed.
The First Circuit held that Maine’s Article 9 insurance exclusion removes such rights from the ordinary UCC secured transactions framework, meaning that a creditor cannot rely on a standard Article 9 filing to establish or perfect a lien in insurance payment rights. The case was significant because, much to the dismay of Wheeling which claimed that it held a security interest in the proceeds because of its security agreement, the court clarified that insurance proceeds occupy a distinct legal category and are not automatically swept into broad collateral descriptions such as “accounts” or “payment intangibles.”
The opinion is also important because it ties that statutory interpretation to the underlying policy of perfection law: notice to other creditors. Once the court concluded that Article 9 did not apply, it looked to Maine common law and rejected the creditor’s argument that its existing security agreement and UCC-1 filing were enough to perfect its interest in the proceeds from the Travelers’ policy. The court reasoned that Maine law does not favor secret liens and would require some additional steps that actually provide adequate notice of a claimed interest in insurance rights. That part of the decision is particularly useful because it shows that the analysis does not end when Article 9 drops out; the court must still ask whether the creditor took legally meaningful steps to perfect its interest under applicable non-UCC law.
From a bankruptcy standpoint, the decision is important because it prevented Wheeling from capturing insurance-settlement proceeds based on an overbroad reading of its lien documents and preserved those funds for the bankruptcy estate. The case thus serves as a careful reminder that unusual collateral requires careful perfection analysis, and that courts should not assume Article 9 provides the answer simply because a lender has filed a financing statement.
[1] As the First Circuit wrote:
The [Security] Agreement purposed to grant Wheeling a security interest in:
- A. All Accounts and other rights to payment (including Payment Intangibles), whether or not earned by performance, including but not limited to, payment for property or services sold, leased, rented, licensed, or assigned. This includes any rights and interests (including all liens) that [MMA] may have by law or agreement against any account debtor or obligor of [MMA].
- B. All Inventory[.]
- C. All additions, accessions, substitutions, replacements, products to or for, and all cash or non-cash proceeds of any of the foregoing, including insurance proceeds.
It further provided that all rights thereunder were to be governed by Maine law, except where Maine’s iteration of the UCC directed application of the law of the state in which MMA was located (Delaware).
In re Montreal, Maine & Atl. Ry., Ltd., 799 F.3d 1, 3 (1st Cir. 2015).