558 B.R. 473
1st Cir. BAP2016Background
- Montreal, Maine & Atlantic Railway (MMA) operated an integrated freight railroad and interchanged traffic with New Brunswick Southern Railway (NBSR) and Maine Northern Railway (MNR) (the "Irving Railroads"). MMA participated in the Interline Settlement System (ISS); the Irving Railroads did not. MMA billed customers and remitted portions to the Irving Railroads.
- The parties had a Commercial Agreement under which the Irving Railroads performed transportation services (interchanging and moving freight cars) and MMA acted as billing/interline tariff carrier. To mitigate credit risk, the Irving parties and affiliated paper companies used a weekly "payment swap" to settle mutual payables; oil-related interline charges were later carved out to be paid upon MMA’s receipt from the ISS.
- MMA suffered a catastrophic oil-train derailment and filed chapter 11. NBSR and MNR timely filed proofs of claim asserting substantial interline freight claims, claiming a portion qualified as § 1171(b) "six months" priority claims.
- The trustee (Appellant) objected, arguing (inter alia) that interline claims are general unsecured claims under controlling law and that the Irving Railroads relied on MMA’s general credit. The bankruptcy court held the claims could qualify under the First Circuit’s Boston & Maine II three-part test and found, on the evidence, that the claims satisfied that test.
- The trustee appealed the interlocutory order (grant of § 1171(b) priority status in principle; amounts deferred). The Bankruptcy Appellate Panel affirmed.
Issues
| Issue | Appellant's Argument | Irving Railroads' Argument | Held |
|---|---|---|---|
| Are interline freight claims categorically ineligible for § 1171(b) six-month priority? | Interline claims are general unsecured claims under post-Code law and cannot receive § 1171(b) priority. | Boston & Maine II recognizes interline claims as a class that may receive six-month priority if they meet the three-part test. | Not ineligible as a matter of law; interline claims may qualify if they meet Boston & Maine II criteria. |
| Did the Irving Railroads’ charges constitute a "good or service" under Boston & Maine II? | Charges were merely for track use/collection agent activity and partly arose from MMA’s collections failure, not a good/service to MMA. | The Irving Railroads performed transportation services (interchange, haul to final destination); MMA contracted for those services. | Court found the Irving Railroads provided transportation services; requirement satisfied. |
| Were the claims "current operating expenses necessarily incurred"? | "Necessary" should mean indispensable to prevent cessation of operations (doomsday standard); these claims were not indispensable. | Interline interchange is a class of claims indispensable to continued railroad operations and therefore satisfies the necessity prong. | Boston & Maine II standard applied: necessity is class-based; interline interchange was shown to be necessary. Requirement satisfied. |
| Did claimants expect payment from MMA’s current operating revenues rather than reliance on MMA’s general credit? | The triangular swap/setoff and other arrangements show the Irving parties relied on MMA’s credit or special security arrangements, disqualifying § 1171(b) treatment. | Parties structured payments to avoid credit risk (swap/ISS timing); they expected payment from operating receipts/ISS proceeds, not MMA’s general credit. | Bankruptcy court’s factual findings supported that payment expectation was from current receipts (ISS/payments), not reliance on general credit; requirement satisfied. |
Key Cases Cited
- In re Boston & Maine Corp., 600 F.2d 307 (1st Cir. 1979) (addressed timing/payment discretion for interline per diem charges during reorganization)
- In re Boston & Maine Corp., 634 F.2d 1359 (1st Cir. 1980) (articulated three-part test for § 1171(b) six-month priority and recognized interline claims can qualify)
- Miltenberger v. Logansport Ry. Co., 106 U.S. 286 (1882) (authority for allowing priority payment to prevent stoppage of essential services)
- Fosdick v. Schall, 99 U.S. 235 (1879) (discussed the "current debt fund" concept influencing priority analyses)
- In re Penn Cent. Transp. Co., 486 F.2d 519 (3d Cir. 1973) (discussed trustee authority and court discretion to authorize prepetition payments during reorganization)