PORTLAND – In a courtroom packed with dozens of lawyers Thursday, the judge presiding over the Montreal, Maine & Atlantic Railway’s bankruptcy proceedings expressed concern that attorneys’ fees will suck the company dry of funds before victims of last month’s deadly train derailment in Quebec can be compensated.
“What’s concerning me is a run-up of administrative expenses that would make operation of the railroad impossible,” said U.S. Bankruptcy Judge Louis Kornreich. “There’s not a lot of extra revenue.”
If legal fees drain the company of its cash, there will be nothing left to compensate victims of the July 6 accident in which an unmanned train loaded with crude oil rolled downhill into the town of Lac-Megantic, Quebec, derailed and exploded, killing 47 people and destroying 40 buildings in the heart of town.
Several groups of lawyers, representing various interests in the bankruptcy, attended Thursday’s hearing on motions to keep the railroad running while its newly appointed trustee assesses its financial situation.
Interested parties include creditors such as Wheeling & Lake Erie Railway Co. and New Brunswick Southern Railway Company Ltd., state and federal transportation agencies, unions, banks, the Montreal, Maine & Atlantic, its affiliated company Rail World Inc., and its court-appointed trustee, Robert Keach.
Lawyers filled all the seats at the tables before the judge, including a back bench. Lawyers also filled about half the courtroom’s gallery. Still more were dialed into a conference call from their offices during the hearing.
Two groups of attorneys said they represented the victims of the Lac-Megantic disaster, and each seemed unaware of the other’s participation in the case.
By court order, Keach has assumed all responsibility for managing the company’s finances. His Portland law firm, Bernstein Shur Sawyer & Nelson, will represent the railroad in court.
Lawyers at Bernstein Shur charge as much as $375 an hour for their services, according to an affidavit filed in U.S. Bankruptcy Court for the District of Maine.
Keach acknowledged to the judge that legal and administrative costs could run the railroad into the ground.
“It’s certainly conceivable that this case is administratively insolvent as we stand here,” he said.
Operation of the railway, which runs from Quebec toward New Brunswick through central Maine, has been in jeopardy since the derailment. The company filed for Chapter 11 bankruptcy reorganization about a month after the accident.
The bankruptcy case is complex, Keach said. It spans two countries and is connected to a human tragedy with numerous victims. In addition, it involves a railroad, which by federal law cannot be shut down.
Keach said he has spoken with the company’s creditors about letting it borrow money to pay for its bankruptcy case.
Cutting corners on the case to save money would do a disservice to participants in the bankruptcy, he said. “I don’t think there’s any substitute for administering this case properly.”
According to documents filed in bankruptcy court, the railway company is worth $50 million to $100 million and owes about $39 million to its largest creditors. In all, the company estimates that it has more than 200 unsecured creditors, which are businesses or individuals who are owed money but do not have collateral or legal means to force repayment.
Several lawsuits also have been filed since the accident, including a potential class action by victims and by family members of victims from Lac-Megantic.
The railroad’s chairman, Ed Burkhardt, said in a written statement that the company’s obligations exceed the value of its assets, including its expected insurance payouts from the accident.
Keach said the primary objectives of the bankruptcy should be to keep the railroad operating and compensate the victims.
He said the railroad has enough money to operate on a break-even basis in the near future, and advised the other parties in the case to cooperate to complete the bankruptcy process as quickly as possible.
“We need to come to a consensual approach to meeting these two goals,” he said.
The U.S. Trustees Office appointed Keach, a lawyer who specializes in bankruptcy, as trustee for the railroad Wednesday.
Keach then filed a request with the court to hire Bernstein Shur to represent the Montreal, Maine & Atlantic Railway while he is trustee, according to court records,
The railroad, based in Hermon, owns 512 miles of line in Maine and Canada. Most of its workers have been laid off since the accident disrupted operations.
Because it operates in two countries, the railroad consists of two companies, the Montreal, Maine & Atlantic Canada Co. in Canada and the Montreal, Maine & Atlantic Railway Ltd. in the United States. Each company has its own board of directors.
The Canadian company filed for bankruptcy under Canadian law in Superior Court of Quebec in Montreal, while its sister company in Maine filed for protection from creditors under Chapter 11 of the U.S. Bankruptcy Code.
Because railroads are critical for commerce and have monopoly status, U.S. bankruptcy law has special rules to ensure that they continue to operate and are not liquidated. In fact, railroads are not allowed to file for Chapter 7 bankruptcy, which is used when a company closes its business and sells off its assets.
If a railroad ceases operations, the federal Surface Transportation Board has the authority to order another railroad to provide service to its customers.
Burkhardt has said essential rail services will continue at all stations in Quebec, Maine and Vermont, except in Lac-Megantic because the rail yard there is under the control of authorities who are investigating the accident.
Beth Slavy, an attorney representing the Maine Department of Transportation, said keeping the railroad functional is a matter of broad public concern.
“Continued operation of the rail is in the public interest of Maine,” she said.
J. Craig Anderson can be contacted at 791-6390 or at: