Thursday, September 10, 2015

First Circuit holds that under Maine law perfection of security interest in insurance proceeds requires fair notice to all other creditors

Wheeling extended to MMA, a railroad company, a $6,000,000 line of credit.  To secure the loan MMA granted Wheeling a security interest in, among other assets, all insurance proceeds. 

Wheeling sought to perfect its security interest by filing a UCC-1 financing statement with the Delaware Department of State.  The financing statement described the collateral as "all of MMA's inventory, accounts, and payment intangibles (as those terms are defined in the Uniform Commercial Code)." 

Travelers issued a commercial property insurance policy to MMA.  The policy had $7,500,000 of total coverage.

An MMA freight train derailed on Quebec, sparking massive explosions, destroying part of a town, and killing 47 people. 

MMA filed a claim with Travelers for lost business income.  Travelers denied the claim, asserting that the policy did not cover business interruption. 

MMA filed a petition for Chapter 11 bankruptcy and a trustee was appointed.

Wheeling was by then owed the entire $6,000,000 under the line of credit.  It instituted an adversary proceeding against MMA, Travelers, and the trustee in which it sought  a declaration regarding the nature, extent, validity, and priority of its asserted security interest in any payments due under the Travelers policy. 

MMA and the trustee entered into negotiations with Travelers that culminated in a settlement agreement requiring Travelers to pay $3,800,000 to MMA in satisfaction of all claims  under the policy.

Wheeling objected to the settlement, arguing that it held a perfected security interest in all payment rights belonging to MMA.

The United States Bankruptcy Court held that MMA was entitled to the settlement proceeds free and clear of Wheeling's asserted interest because under Maine common law Wheeling had failed to perfect its interest.

In In re Montreal, Maine & Atlantic Railway, LTD, __ F.3d __, 2015 WL 4934212 (1st Cir.), the United States Court of Appeals for the First Circuit interpreted the controversy under Maine law. 

Article 9 of the Uniform Commercial Code, as enacted in Maine, applies to the creation of security interests in rights to payment, but the court noted that it excludes certain transactions from its scope; the validity of such transactions is determined by reference to other statutes or to common law.

One subset of excluded transactions is the transfer of an interest in or assignment of a claim under a policy of insurance.  The court held that the exclusion included payment rights under insurance policies. 

The court held that Maine law has not yet determined how an interest in insurance proceeds may be perfected.  The court predicted that the Maine Supreme Judicial Court would adopt a perfection rule requiring more than what Wheeling did; it would require a step that would furnish fair notice to all other creditors. 

Because Wheeling did not perfect its security interest in the insurance proceeds, MMA was entitled to the settlement payment free and clear of Wheeling's security interest. 

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