888 F.3d 1
1st Cir.2018Background
- Montreal, Maine & Atlantic Railway (the debtor) sold ~233 miles of track (the Lines) to the State of Maine for ≈ $21M; sale proceeds were to be distributed per a loan modification (the Second Amendment) with the FRA.
- The FRA held a senior lien on the Lines but agreed in the Second Amendment to a limited waiver conditioned on the debtor depositing sale proceeds with an escrow agent and distributing them in a specified waterfall after the FRA perfected a replacement lien on Canadian collateral.
- The waterfall allocated roughly $2.4M to the FRA, ≈ $14M to 2003 Investors, ≈ $1M for accounts payable, and the remainder to Wheeling & Lake Erie (Wheeling) to pay down a $6M line of credit; Wheeling received $2,708,912.20.
- The debtor later filed Chapter 11; the Chapter 11 trustee (Keach) sued Wheeling under 11 U.S.C. § 544(b) and Maine’s UFTA to avoid the disbursement as a fraudulent transfer to an insider.
- Bankruptcy court dismissed for failure to state a claim, concluding proceeds were encumbered and not estate property; district court affirmed. The First Circuit affirms on different reasoning: the Second Amendment made the debtor a bailee/disbursing agent with no avoidable property interest in the proceeds.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the waterfall disbursement to Wheeling constituted an "interest of the debtor in property" avoidable under § 544(b) | Trustee: proceeds were unencumbered assets of the debtor and thus avoidable; debtor controlled and used them to reduce its debt | Wheeling: proceeds were subject to the Second Amendment and the FRA's conditions; debtor acted only as escrow/bailee and lacked control or ownership | Held: Not estate property. The Second Amendment made the debtor a disbursing agent/bailee with no cognizable property interest, so § 544(b) avoidance fails |
| Whether the timing of the FRA's lien release meant proceeds were unencumbered at transfer | Trustee: lien release occurred before disbursement, so proceeds were unencumbered | Wheeling: lien remained effectively encumbering until compliance with the waterfall | Held: Court did not decide timing; disposition rests on the lack of debtor control under the contract, making timing irrelevant |
| Whether trustee should have been granted leave to amend the complaint | Trustee: sought leave to add allegations to make claim plausible | Wheeling: request was untimely and futile; trustee waived by not seeking amendment in bankruptcy court | Held: Denied. Trustee waived in lower court and amendment would be futile given clear Second Amendment terms |
Key Cases Cited
- Begier v. Internal Revenue Service, 496 U.S. 53 (Sup. Ct. 1990) (defining "property of the debtor" as what would have been part of the estate absent prebankruptcy transfer)
- In re Computrex, Inc., 403 F.3d 807 (6th Cir. 2005) (funds held by debtor as a mere disbursing agent are not estate property)
- In re LAN Tamers, Inc., 329 F.3d 204 (1st Cir. 2003) (insurance payments sent to debtor as intermediary are not estate property)
- Pearlman v. Reliance Ins. Co., 371 U.S. 132 (Sup. Ct. 1962) (trustee cannot distribute other people's property among bankrupt's creditors)
- In re Montreal, Me. & Atl. Ry., 799 F.3d 1 (1st Cir. 2015) (prior related appellate decision involving these parties)
- Privitera v. Curran (In re Curran), 855 F.3d 19 (1st Cir. 2017) (Rule 12(b)(6) standards and amendment practice in bankruptcy appeals)