Wheeling & Lake Erie Railway Co. v. Keach (In re Montreal, Maine & Atlantic Railway, Ltd.)
521 B.R. 703
1st Cir. BAP2014Background
- Debtor Montreal, Maine & Atlantic Railway Ltd. (and affiliate MMAC) granted Wheeling & Lake Erie Railway a security interest in accounts, inventory, and “all ... cash or non-cash proceeds,” and Wheeling filed a UCC‑1 in Delaware. The security agreement was governed by Maine law.
- Travelers issued a $7.5M commercial property policy to Debtor/MMAC. After a catastrophic derailment (Lac‑Mégantic), Debtor asserted Business Interruption and Extra Expense claims under the policy.
- Travelers disputed coverage; parties ultimately settled for $3.8M to be split 65% to MMAC and 35% to the Debtor (the “Settlement Payment”). The Trustee sought court approval; Wheeling objected claiming a perfected first‑priority security interest in the Settlement Payment.
- Bankruptcy court approved the settlement but reserved the question whether Wheeling’s security interest extended to the Policy proceeds; it later held Wheeling had not perfected any interest in the Settlement Payment under Maine UCC Article 9 or Maine common law.
- Wheeling appealed; the district/appeal panel reviewed the legal issue de novo and affirmed the bankruptcy court: Article 9’s insurance exclusion and Maine common law perfection requirements prevented Wheeling’s UCC filing alone from perfecting an interest in the insurance proceeds.
Issues
| Issue | Wheeling's Argument | Trustee's Argument | Held |
|---|---|---|---|
| Whether Article 9 of the Maine UCC permitted Wheeling’s UCC‑1 to perfect a security interest in the Settlement Payment (insurance proceeds) | The Settlement Payment is an “account” or “payment intangible” under revised Article 9, so the filed UCC‑1 perfected Wheeling’s interest | The Maine UCC explicitly excludes transfers or assignments of claims under insurance policies from Article 9 coverage; proceeds from the Policy are therefore outside Article 9 | Held for Trustee — Article 9’s insurance exclusion applies; UCC‑1 filing did not perfect Wheeling’s interest |
| Whether the 2000 Article 9 amendments (expanded “account” and new “payment intangible”) sweep insurance payment rights into Article 9 | The revised definitions encompass payment rights arising from any contract, including insurance, so Article 9 should apply | Amendments did not repeal or narrow the insurance exclusion; the "account" language targets insurer/agent receivables (e.g., premiums/commissions), not an insured’s claim for loss | Held for Trustee — amendments do not abrogate the insurance exclusion; insured’s right to loss payment remains outside Article 9 |
| Whether a legal distinction between a “claim under a policy” and a “right to payment” renders the latter subject to Article 9 | A right to payment under the policy is a distinct economic intangible that fits Article 9 definitions and thus can be perfected by UCC filing | The UCC exclusion cannot be read to oscillate in/out based on form; the drafters intended insurance‑based rights to be treated outside Article 9 in these contexts | Held for Trustee — the asserted distinction does not bring the Settlement Payment within Article 9 |
| Whether Wheeling perfected an enforceable security interest under Maine common law (outside Article 9) | Maine common law does not require physical possession of the policy to perfect a security interest in the intangible right to payment; a security agreement (or other steps) may suffice | Maine common law requires more than a UCC‑1 filing — historically possession or insurer notice (or other concrete steps) have been required to protect third parties | Held for Trustee — Wheeling took no steps (possession, notice, loss‑payee status) beyond filing a UCC‑1; common law perfection failed |
Key Cases Cited
- Butner v. United States, 440 U.S. 48 (U.S. 1979) (state law determines property rights in bankruptcy)
- Meridian Bank v. Bell Fuel Corp., 891 F.2d 281 (3d Cir. 1989) (held business‑interruption proceeds could be treated as proceeds of collateral under Article 9; court criticized in later decisions)
- American Bank, FSB v. Cornerstone Cmty. Bank, 733 F.3d 609 (6th Cir. 2013) (transfers or assignments of interests/claims under insurance policies excluded from Article 9)
- A-1 Credit Corp. v. Big Squaw Mountain Corp., 122 B.R. 831 (Bankr. D. Me. 1990) (under Maine law, insurer notice plus possession of financing agreement sufficed to protect insurer‑related interests; Article 9 exclusion discussed)
- Thico Plan, Inc. v. Maplewood Poultry Co., 2 B.R. 550 (Bankr. D. Me. 1980) (Maine common law requires possession of insurance policy for enforceability of pledge of intangibles against third parties)