Keach v. Wheeling & Lake Erie Railway Co. (In re Montreal, Maine & Atlantic Railway, Ltd.)

Keach v. Wheeling & Lake Erie Railway Co. (In re Montreal, Maine & Atlantic Railway, Ltd.)

Opinion

 [*4]  SELYA, Circuit Judge. This appeal requires us to explore the labyrinth of high-stakes bankruptcy law to determine whether the proceeds of a multi-million-dollar sale of certain railroad lines constituted property of the bankruptcy estate. Although we are skeptical of the rationale employed by the courts below and thread our way through this maze along a different ratiocinative path, we arrive at the same place: we conclude that the disputed funds were not property of the bankruptcy estate. Consequently, we affirm the dismissal of the complaint.

I. BACKGROUND

] Because this appeal challenges an order of dismissal for failure to state an actionable claim, we take the facts from the well-pleaded [**2]  averments contained in the complaint, supplemented from other permissible sources. See Banco Santander de P.R. v. Lopez-Stubbe (In re Colonial Mortg. Bankers Corp.), 324 F.3d 12, 15-16 (1st Cir. 2003). In carrying out this task, we assume the reader's familiarity with our opinion in earlier litigation involving the same parties. See Wheeling & Lake Erie Ry. v. Keach (In re Montreal, Me. & Atl. Ry.) (MMA I), 799 F.3d 1, 3-4 (1st Cir. 2015).

In 2002, Montreal, Maine & Atlantic Railway, Ltd. (the debtor) and a group of related entities purchased the assets of several United States and Canadian railways. On January 8, 2003, a consortium of investors (the 2003 Investors) provided $15,000,000 to the purchasers in return for a series of subordinated notes and warrants. Despite this infusion of cash, the debtor soon found itself strapped and procured a $34,000,000 loan from the Federal Railroad Administration (the FRA). As part of this transaction, the FRA obtained a senior lien on all of the debtor's rail lines and related improvements in the United States. Several years later, the appellee, Wheeling & Lake Erie Railway Company (Wheeling), furnished a $6,000,000 line of credit to the debtor — a transaction memorialized by a promissory note dated June 15, 2009 and a security agreement.

Notwithstanding these efforts, the debtor struggled to [**3]  meet its financial obligations. By late 2010, it owed $906,579.38 in overdue principal and $1,466,355.58 in accrued interest to the FRA. To obtain needed funds, the debtor proposed to sell approximately 233 miles of track located in northern Maine (the Lines) to the State of Maine. In order to make this transaction feasible, the debtor enlisted FRA's cooperation and, on December 29, 2010, it agreed with the FRA to amend the existing loan agreement.

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