Montreal, Maine and Atlantic Railway files for bankruptcy protection

October 2013  |  DEALFRONT  |  BANKRUPTCY & RESTRUCTURING

Financier Worldwide Magazine

October 2013 Issue

October 2013 Issue


Railway operator Montreal, Maine and Atlantic Railway Ltd (MMA) was forced to file for bankruptcy protection in August due to mounting costs and potential liabilities – the result of a crude oil train explosion which killed 47 people in July. 

MMA filed for bankruptcy protection under the Companies’ Creditors Agreement Act at the superior court of Québec, Montreal, while simultaneously filing for Chapter 11 bankruptcy protection at a US bankruptcy court in Maine. The company noted in its bankruptcy filings that its revenues had significantly deteriorated since the crash on 6 July. Accordingly, MMA is no longer able to meet its burgeoning financial obligations. Edward Burkhardt, chairman of the board of both the Canadian and American branches of the company, said “It has become apparent that the obligations of both companies now exceed the value of their assets, including prospective insurance recoveries”. 

According to MMA, the bankruptcy filing will allow the company to carry on as a going concern and will enable the firm to continue to provide essential rail services to all stations in Québec, Maine and Vermont. Employees of both the Canadian and US divisions of MMA will also continue to receive their wages and benefits as scheduled. 

On 8 August, Québec superior court Judge Martin Castonguay granted MMA bankruptcy protection noting that the decision was taken to “prevent legal anarchy”. Judge Castonguay also described the company’s behaviour as “deplorable” and criticised the company’s management team. In Maine, bankruptcy Judge Louis Kornreich ordered the appointment of a federal trustee to oversee MMA’s US bankruptcy case and to help ensure that the company remains operational in order to provide essential services to local communities. 

However, the Canadian Transportation Agency announced on 13 August that the company’s operating certificate had been suspended as of 20 August onwards. In a statement the transport authority noted that MMA lacked sufficient liability coverage in the wake of the disaster. “It would not be prudent, given the risks associated with rail operations, to permit MMA and MMAC to continue to operate without adequate insurance coverage,” said Geoff Hare, chairman and chief executive of the Canadian Transportation Agency. 

In the early hours of 6 July, a 73-car train operated by MMA crashed near the centre of Lac-Mégantic, a town in the Eastern Townships region of Quebec. The train had been parked uphill from the town and was left unattended overnight when it began to roll out of control. As a result of the accident 47 people lost their lives and around 40 buildings in the town’s core were destroyed. The accident saw around 5.6 million litres of crude oil spilled. MMA estimates that cleanup costs from the accident could exceed $193.6m, according to the company’s Canadian court filing. 

MMA faces a number of civil and criminal investigations into the events leading to the crash, the worst rail disaster in Canada since 1910. Indeed, MMA’s decision to file for bankruptcy has sparked great anger within the Lac-Mégantic area. As a result of the filing, many local residents fear that the families of the victims of the crash may not receive the compensation they are seeking through class action and individual lawsuits against MMA. These cases have been filed against the company in both the US and Canada. 

MMA’s liability insurer, XL Insurance Co, has yet to make any payments under the company’s existing insurance policy. According to the respective bankruptcy filings, neither the US or Canadian arms of MMA are able to make any payments at this stage “given their financial situation”. MMA’s policy holds a $25m liability insurance policy with XL, which covers costs related to evacuation, fire suppression, pollution cleanup, bodily injury and property damage. 

The court paperwork for MMA Canada lists assets of around $18m, most of which consists of its real estate portfolio and considerable track structure. MMA also cited liabilities of $48.1m, $43.4m of which is due to the company’s parent company, Rail World Inc of Chicago. The company’s US court filing listed assets of $50m to $100m, MMA also has between 200 and 999 creditors, including the US government, which is owed around $27.5m under a Federal Rail Administration credit facility.

© Financier Worldwide


BY

Richard Summerfield


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