Montreal Maine Railway Files for Bankruptcy After Crash

Montreal, Maine & Atlantic Railway Ltd., the operator of the runaway oil train that exploded and killed 47 people in a Quebec town, said it was forced to file for bankruptcy because of potential liability from the crash.

Service will continue during the restructuring, the carrier said after yesterday’s filing in U.S. Bankruptcy Court in Bangor, Maine. An affiliated company, Montreal, Maine & Atlantic Canada Co., filed a petition in Canada, where the accident marked the country’s worst rail disaster since 1910.

Those moves were foreshadowed by Chairman Edward Burkhardt, who signaled last month that the railroad’s viability was in question. A criminal probe by Quebec authorities is under way, the town of Lac-Megantic is seeking financial aid to restore the gutted community and a civil complaint alleges a failure to take steps to prevent the derailment.

“This announcement does not mean that MM&A is off the hook for their responsibilities to the people of Lac-Megantic,” Ashley Kelahear, a spokeswoman for Canadian Transport Minister Lisa Raitt, said in an e-mail. “We will work with the Province of Quebec to ensure that the cleanup continues and that the people of Lac-Megantic continue to receive the support they need.”

Quebec Superior Court Justice Martin Castonguay granted the company’s Canadian unit creditor protection today, Pierre Legault, a Montreal-based lawyer who represents the railroad, said in a telephone interview. A hearing has been set for Aug. 23, Canada’s RDI television reported.

Obligations, Assets

Shortly after 1 a.m. on July 6, the 73-car train crashed near the center of the town of 5,932 people about 16 kilometers (10 miles) north of Maine. A wall of flames 12 stories high incinerated buildings in Lac-Megantic’s center.

“The obligations of both companies now exceed the value of their assets, including prospective insurance recoveries, as a direct result of the tragic derailment,” Burkhardt said yesterday in a statement referring to Hermon, Maine-based Montreal, Maine & Atlantic and its affiliated Canadian business.

The train had been left unattended for the night outside Lac-Megantic, and Canadian investigators with the Transportation Safety Board found that the brakes weren’t applied with enough force to stop the cars from rolling during the incident.

Montreal, Maine & Atlantic was sued July 22 in state court in Chicago, along with Burkhardt and several fuel companies, over the rail disaster. Burkhardt is the chief executive of the carrier’s parent company, Rail World Inc., based in the Chicago suburb of Rosemont, Illinois.

Claims from the disaster are “sufficiently large that it would be impossible or impractical to continue as a going concern without the protection” of U.S. bankruptcy law, Montreal, Maine & Atlantic railroad said in its filing.

Under U.S. law, a bankruptcy filing by a company halts lawsuits by creditors seeking to collect on claims.

“Given the dramatically reduced cash flow and increase in liabilities, a bankruptcy filing is the only option to preserve the value of the system,” the company said in court papers.

1864 Roots

Montreal, Maine & Atlantic traces its roots to 1864. It hauls pulp and paper, petroleum and chemicals along 510 miles of track in Maine, Vermont and Quebec, according to its website. The company listed assets of as much as $100 million and debt of as much as $10 million in its U.S. bankruptcy filing.

Environmental cleanup costs will probably exceed C$200 million ($194 million), according to the company’s Canadian court filing. Montreal, Maine & Atlantic’s liability insurer, XL Insurance Co., has failed to make any payments under the insurance policy, and neither Montreal, Maine & Atlantic nor its Canadian unit is able to pay at this stage “given their financial situation,” according to the document.

Montreal, Maine & Atlantic holds a $25 million liability insurance policy with XL, which covers costs for evacuation, fire suppression, pollution cleanup, bodily injury and property damages, according to the filing.

The U.S. government is among the Montreal, Maine & Atlantic’s creditors, with the railroad owing $27.5 million under a Federal Rail Administration credit facility, according to court papers.

Surete du Quebec’s criminal investigation into the railroad isn’t affected by the filing, said a spokeswoman for the provincial police force who declined to give her name. The Transportation Safety Board’s inquiry also isn’t expected to be affected, said Chris Krepski, an agency spokesman.

Lac-Megantic Mayor Colette Roy-Laroche told Radio-Canada television yesterday that the cleanup there is continuing.

“This is not a surprise to us,” Roy-Laroche said. “We can reassure the population that the work will continue despite today’s announcement.”

About 5.7 million liters (1.5 million gallons) of crude spilled from the damaged rail cars, Quebec’s environment ministry said. The Montreal, Maine & Atlantic train contained about 7.2 million liters of crude at the time of the derailment, the Canadian government said.

Career Railroader

Burkhardt, the Montreal, Maine & Atlantic chairman, founded parent Rail World in 1999 after a railroading career that included the formation of Wisconsin Central Transportation Corp. in 1987.

He made his name by turning unprofitable castoffs into successful businesses. Wisconsin Central was created from lines that Soo Line Railroad deemed unprofitable in the wake of the U.S. rail industry’s 1980 deregulation. In the 1990s, Burkhardt expanded the company’s international reach by helping privatize freight rail networks in New Zealand and the U.K.

In 1999, he was pushed out at Wisconsin Central after a 60 percent stock-price decline over a 2 1/2-year period, and he formed Rail World in the same month. Rail World created Montreal, Maine & Atlantic after buying the assets of bankrupt Bangor & Aroostook Railroad Co. in early 2003.

Cleanup Order

Montreal Maine & Atlantic and its Canadian unit were among the parties targeted by an emergency decontamination order issued July 29 by Quebec’s environment minister to clean up oil from the crash.

Miami-based World Fuel Services Corp. (INT) and Western Petroleum Co. of Eden Prairie, Minnesota owned, and continue to own, the crude spilled at Lac-Megantic, according to the government order.

Lac-Megantic had to pay about C$8 million to eight contractors hired by the railroad to clean up the spilled crude because the carrier hadn’t paid for the work, Mayor Roy-Laroche said July 30 at a televised news conference. Letters demanding payment sent by Lac-Megantic’s lawyers remained unanswered as of last week, the mayor said at the time.

The bankruptcy case is In re Montreal Maine & Atlantic Railway, 1:13-bk-10670, U.S. Bankruptcy Court, District of Maine (Bangor). The lawsuit is Roy v. Montreal Maine & Atlantic Railway, 2013-LOO8272, Circuit Court of Cook County, Illinois (Chicago).

To contact the reporters on this story: David McLaughlin in New York at dmclaughlin9@bloomberg.net; Tiffany Kary in New York at tkary@bloomberg.net; Frederic Tomesco in Montreal at tomesco@bloomberg.net

To contact the editors responsible for this story: Michael Hytha at mhytha@bloomberg.net; Andrew Dunn at adunn8@bloomberg.net; Ed Dufner at edufner@bloomberg.net

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