Keach v. Wheeling & Lake Erie Ry. Co. , 888 F.3d 1 ( 2018 )

United States Court of Appeals
For the First Circuit
No. 17-1912
IN RE MONTREAL, MAINE & ATLANTIC RAILWAY, LTD.,
Debtor.
̶̶̶̶̶̶̶̶̶̶̶̶̶̶̶̶̶̶̶
ROBERT J. KEACH, solely in his capacity as the Chapter 11
trustee for MONTREAL, MAINE & ATLANTIC RAILWAY, LTD.,
Appellant,
v.
WHEELING & LAKE ERIE RAILWAY COMPANY,
Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MAINE
[Hon. Jon D. Levy, U.S. District Judge]
[Hon. Peter G. Cary, U.S. Bankruptcy Judge]
Before
Thompson, Circuit Judge,
Souter, Associate Justice,
and Selya, Circuit Judge.

Hon. David H. Souter, Associate Justice (Ret.) of the Supreme
Court of the United States, sitting by designation.
Robert J. Keach, with whom Lindsay K.Z. Milne, Roma N. Desai,
and Bernstein, Shur, Sawyer & Nelson, P.A. were on brief, for
appellant.
George J. Marcus, with whom David C. Johnson, Andrew C.
Helman, and Marcus, Clegg & Mistretta, P.A. were on brief, for
appellee.
̶̶̶̶̶̶̶̶̶̶̶̶̶̶̶̶̶̶
April 18, 2018
___________________
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 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
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$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
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.
This amendment, which we shall call the Second
Amendment, lies at the epicenter of this litigation. Under Section
3.b, the FRA agreed to provide "a limited waiver" of its senior
lien over the Lines, which would take effect "upon the closing" of
the proposed sale to the State of Maine. In exchange, the FRA
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received a replacement lien on certain of the debtor's property in
Canada.
As relevant here, the FRA conditioned its "limited
waiver" of its senior lien on the debtor's compliance with a series
of conditions spelled out in Section 3.b.ii of the Second
Amendment. The FRA concluded that these conditions and the
concomitant amendments to the parties' prior agreement were
"equitable and in the overall best interest of the United States"
in accordance with 45 U.S.C. § 823.
Pertinently, the Second Amendment required the debtor,
upon the closing of the sale, to convey the proceeds to an escrow
agent. Once the FRA's replacement lien on the Canadian property
had been perfected, the debtor was to pay the FRA roughly
$2,400,000 of the sale proceeds (representing the sum of the FRA's
overdue principal and accrued interest), pay roughly $14,000,000
to the 2003 Investors, reserve roughly $1,000,000 to defray certain
accounts payable, and distribute the remainder of the proceeds to
Wheeling to reduce the debtor's outstanding balance under the 2009
credit agreement.
The record contains few details as to how the parties
shaped the contours of this waterfall of disbursements. In this
regard, though, the complaint does allege that the 2003 Investors
"demanded full payment as a condition to allowing the transaction
to occur." The complaint also alleges an overlap between the
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leadership of Wheeling and the leadership of the debtor. It offers
several examples of this perceived overlap, such as the fact that
Larry R. Parsons was the principal owner of Wheeling and served as
a board member of the debtor and the fact that ABC Railway (a
wholly owned subsidiary of Wheeling) was a shareholder of the
debtor's parent company.
On January 4, 2011, the State of Maine agreed to pay
approximately $21,000,000 for the Lines (of which approximately
$1,000,000 was to be retained by Maine and applied to other debt
owed to Maine). The debtor distributed the proceeds in accordance
with the waterfall provision of the Second Amendment, with the
result that Wheeling received $2,708,912.20 (which was applied to
pay down the debtor's outstanding line of credit). Despite this
effort to stanch the flow of red ink, the debtor's financial woes
persisted and, in mid-2013, it filed a voluntary petition for
protection under Chapter 11 of the Bankruptcy Code. See 11 U.S.C.
§ 301. The bankruptcy court appointed the appellant, Robert J.
Keach, as the Chapter 11 trustee (the Trustee).1
On May 26, 2015, the Trustee instituted an adversary
proceeding against Wheeling, seeking to avoid the waterfall
disbursement made to it as constructively fraudulent under section
1 During the pendency of this proceeding, the Trustee was
appointed estate representative of the post-effective-date estate
pursuant to the debtor's chapter 11 plan of liquidation. For ease
in reference, we refer to him throughout as the Trustee.
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5(b) of Maine's Uniform Fraudulent Transfer Act (UFTA), which
proscribes certain conveyances by an insolvent debtor to an
"insider." See id. § 544(b); 14 M.R.S.A. § 3576(2). Wheeling
moved to dismiss the Trustee's complaint pursuant to Rule 7012 of
the Federal Rules of Bankruptcy Procedure. It argued that the
waterfall disbursements did not consist of "assets" belonging to
the debtor and, in the alternative, that the Trustee had failed
plausibly to allege that Wheeling was an "insider" vis-à-vis the
debtor. Accepting Wheeling's first argument, the bankruptcy court
dismissed the complaint with prejudice for failure to state an
actionable claim. It reasoned that because the waterfall
disbursements were part of a single transaction, all aspects of
which should be deemed to have occurred simultaneously, they
remained encumbered by the FRA's lien up to and until the time of
disbursement (and, therefore, did not comprise property belonging
to the debtor). The bankruptcy court did not reach Wheeling's
alternative ground for dismissal.
The Trustee appealed to the federal district court,
which affirmed on substantially similar reasoning. See Keach v.
Wheeling & Lake Erie Ry. (In re Montreal, Me. & Atl. Ry.) (MMA
II), No. 1:17-CV-00012, 2017 WL 3485560, at *4-5 (D. Me. Aug. 14,
2017). This timely second-tier appeal followed.
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II. ANALYSIS
Congress has established a two-tiered framework for
appellate review in bankruptcy cases. See MMA I, 799 F.3d at 4-
5; City Sanitation, LLC v. Allied Waste Servs. of Mass., LLC (In
re Am. Cartage, Inc.), 656 F.3d 82, 87 (1st Cir. 2011). A litigant
ordinarily may take a first-tier appeal either to the bankruptcy
appellate panel or to the district court. See 28 U.S.C. § 158(a)-
(b). No matter which route is pursued for a first-tier appeal,
further review is available in the court of appeals. See MMA I,
799 F.3d at 5. In such second-tier proceedings, no particular
deference is afforded to the determinations of the first-tier
appellate adjudicator but, rather, we "train the lens of our
inquiry directly on the bankruptcy court's decision." Id.
As said, the bankruptcy court dismissed the complaint
under Bankruptcy Rule 7012(b), which in effect replicates Federal
Rule of Civil Procedure 12(b)(6). In such circumstances, the
jurisprudence of Rule 12(b)(6) applies with full force. See
Privitera v. Curran (In re Curran), 855 F.3d 19, 24 (1st Cir.
2017).
We review an order granting a motion to dismiss for
failure to state a claim de novo. See González v. Vélez, 864 F.3d
45, 50 (1st Cir. 2017). In conducting this tamisage, we accept
the complaint's well-pleaded facts as true and "draw all reasonable
inferences therefrom in the pleader's favor." Id. "[A] complaint
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need not set forth 'detailed factual allegations,'" In re Curran,
855 F.3d at 25 (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544,
555 (2007)), "but it must 'contain sufficient factual matter . .
. to state a claim to relief that is plausible on its face,'" id.(quoting Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)).
The plausibility standard requires a court to
choreograph a two-step pavane. See A.G. ex rel. Maddox v.
Elsevier, Inc., 732 F.3d 77, 80 (1st Cir. 2013). First, the court
must "strip away and discard the complaint's conclusory legal
allegations." Shay v. Walters, 702 F.3d 76, 82 (1st Cir. 2012).
Second, "the court must determine whether the remaining facts allow
it 'to draw the reasonable inference that the defendant is liable
for the misconduct alleged.'" Jane Doe No. 1 v. Backpage.com,
LLC, 817 F.3d 12, 24 (1st Cir. 2016) (quoting Morales-Cruz v. Univ.
of P.R., 676 F.3d 220, 224 (1st Cir. 2012)). Dismissal is
warranted when a complaint's factual averments are "too meager,
vague, or conclusory to remove the possibility of relief from the
realm of mere conjecture." SEC v. Tambone, 597 F.3d 436, 442 (1st
Cir. 2010) (en banc).
Against this backdrop, we turn to the plausibility vel
non of the Trustee's claim.2 The bankruptcy code authorizes a
2 The Trustee, who did not attach a copy of the Second
Amendment to his complaint, argues that we may not rely on language
in the Second Amendment in gauging plausibility. This argument
rings hollow. While we primarily "draw the facts from the
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trustee to "avoid any transfer of an interest of the debtor in
property or any obligation incurred by the debtor that is voidable
under applicable law by a creditor holding an [allowable] unsecured
claim . . . ." 11 U.S.C. § 544(b)(1). A prevailing trustee "may
recover, for the benefit of the bankruptcy estate," either the
property transferred fraudulently or its equivalent value. Id.§ 550(a); see Merit Mgmt. Grp., LP v. FTI Consulting, Inc., 138
S. Ct. 883, 889 (2018). "[A]ny property the trustee recovers
becomes estate property and is divided pro rata among all general
creditors." Cadle Co. v. Mims (In re Moore), 608 F.3d 253, 260
(5th Cir. 2010) (emphasis omitted).
The interpretation of the language employed by Congress
in drafting the bankruptcy code — including, as pertinent here,
the term "interest of the debtor in property" under section 544(b)
— is a matter of federal law. See Abboud v. Ground Round, Inc.
operative version of the complaint" in assessing the bona fides of
a motion to dismiss, González, 864 F.3d at 48, we may supplement
those facts in certain ways, see, e.g., Haley v. City of Bos., 657
F.3d 39, 46 (1st Cir. 2011) (identifying, inter alia, "documents
incorporated by reference into the complaint, matters of public
record, and facts susceptible to judicial notice" as permissible
sources of facts); In re Colonial Mortg., 324 F.3d at 15-16(similar). Here, the complaint repeatedly references the Second
Amendment, and the Trustee's entire case hinges on a construction
of that contract. Because the complaint's averments are explicitly
tied to and dependent upon the Second Amendment (the authenticity
of which is not challenged), the Second Amendment is fair game in
gauging the plausibility of the complaint. See Beddall v. State
St. Bank & Tr. Co., 137 F.3d 12, 17 (1st Cir. 1998). We proceed
accordingly.
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(In re Ground Round, Inc.), 482 F.3d 15, 17 (1st Cir. 2007). Even
so, "the existence and extent of the debtor's interest is
ordinarily a creature of state law." Id. (emphasis in original)
(citing Butner v. United States, 440 U.S. 48, 54-55 (1979)). This
framework requires us to make a bifurcated determination: we first
must determine the scope of the debtor's property rights under
state law and then look to federal law, which "dictates to what
extent that interest is property of the estate." Rent-A-Ctr. E.,
Inc. v. Leonard (In re WEB2B Payment Sols., Inc.), 815 F.3d 400,
405 (8th Cir. 2016) (quoting N.S. Garrott & Sons v. Union Planters
Nat'l Bank of Memphis (In re N.S. Garrott & Sons), 772 F.2d 462,
466 (8th Cir. 1985)).
In the case at hand, the parties agree that Maine is the
source of the relevant state law, and we follow their lead. See
Rok Builders, LLC v. 2010-1 SFG Venture LLC (In re Moultonborough
Hotel Grp., LLC), 726 F.3d 1, 5 n.3 (1st Cir. 2013). When applying
Maine law, we rely principally on the jurisprudence of its highest
court (the Maine Supreme Judicial Court, commonly called the Law
Court). See Butler v. Balolia, 736 F.3d 609, 612 (1st Cir. 2013).
Absent an on-point decision of the Law Court, we "endeavor to
predict how [the Law Court] would likely decide the question" by
relying on the "types of sources that the state's highest court
would be apt to consult," such as persuasive out-of-state
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precedents, learned treatises, and public policy considerations.
Id. at 613; see MMA I, 799 F.3d at 10.
The Trustee alleges that Maine's version of the UFTA
renders the waterfall disbursement to Wheeling voidable. Under
that statute, a "transfer" of an asset by a debtor "is fraudulent
as to a creditor whose claim arose before the transfer" if the
debtor, while insolvent, made the conveyance "to an insider for an
antecedent debt" and "the insider had reasonable cause to believe
that the debtor was insolvent." 14 M.R.S.A. § 3576(2). Wheeling
denies not only that it was chargeable with "insider" status but
also that the waterfall disbursement to it involved any "assets"
of the bankruptcy estate.
For purposes of the UFTA, "transfer" and "asset" are
terms of art.3 A "transfer" consists of "[e]very mode . . . of
disposing of or parting with an asset or an interest in an asset."
Id. § 3572(12). An "asset" includes "property of a debtor," but
does not include "[p]roperty to the extent that it is encumbered
by a valid lien." Id. § 3572(2).
The parties argue at length about when the FRA's release
of its lien on the Lines took effect. The Trustee says that this
3 "Insider" is likewise a term of art, but one that need not
concern us. Because we conclude that the waterfall disbursements
did not implicate assets belonging to the bankruptcy estate, see
infra, we have no occasion to address Wheeling's alternative
defense.
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occurred prior to the making of the waterfall disbursement to
Wheeling. In Wheeling's view, though, the lien remained in effect
until the debtor fully complied with the Second Amendment's
waterfall provision. Like the bankruptcy court, the district court
agreed with Wheeling, concluding that all of the waterfall
disbursements dealt with property that was encumbered at the time
of the transfer and, for that reason, did not involve "assets" of
the debtor. See MMA II, 2017 WL 3485560, at *5; see also 14
M.R.S.A. § 3572(2), (12).
We need not resolve the knotty questions concerning the
temporal relationship between the FRA's release of its lien and
the waterfall disbursements. Even if we assume for argument's
sake that the Lines were no longer encumbered by the FRA's lien at
the time the waterfall disbursement to Wheeling was made, the
debtor did not hold an interest in that property that is voidable
under section 544(b). We explain briefly.4
4
Although our reasoning differs from that of the courts
below, such a variance is wholly permissible. When reviewing the
grant of a motion to dismiss for failure to state a claim, we are
not wed to the lower court's reasoning but may affirm on any ground
supported by the record. See Kando v. R.I. State Bd. of Elections,
880 F.3d 53, 58 (1st Cir. 2018); González, 864 F.3d at 50.
In a related vein, the Trustee complains that the ground we
find dispositive was not argued by Wheeling in the bankruptcy
court. This plaint is unavailing. When engaged in de novo review,
"[w]e are at liberty to affirm a district court's judgment on any
ground made manifest by the record, whether or not that particular
ground was raised below." United States v. George, ____ F.3d ___,
___ (1st Cir. 2018) [No. 17-1371, slip op. at 15]; accord Hoover
v. Harrington (In re Hoover), 828 F.3d 5, 8 (1st Cir. 2016); Doe
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The solution to this puzzle hinges on the Second
Amendment. In Maine, as elsewhere, "[i]nterpretation of an
unambiguous [contract] provision is a matter of law, and the
provision is given its plain, ordinary, and generally accepted
meaning." Daniel G. Lilley Law Off., P.A. v. Flynn, 129 A.3d 936,
940 (Me. 2015) (quoting Reliance Nat'l Indem. v. Knowles Indus.
Servs., Corp., 868 A.2d 220, 228 (Me. 2005)). As the plain
language of the Second Amendment makes pellucid, the relationship
between the contracting parties (the debtor and the FRA) was akin
to a bailment, which is an arrangement involving "the delivery of
personal property by one person to another in trust for a specific
purpose, with a contract . . . that the trust shall be faithfully
executed and the property returned or duly accounted for when the
special purpose is accomplished . . . ." Frost v. Chaplin Motor
Co., 25 A.2d 225, 226 (Me. 1942) (citation omitted); see Westleigh
v. Conger, 755 A.2d 518, 519-20 (Me. 2000); Levesque v. Nanny, 53
A.2d 703, 704 (Me. 1947).
Here, the FRA initially held title to the Lines as
mortgagee. See Mortg. Elec. Regist. Sys., Inc. v. Saunders, 2
A.3d 289, 294 (Me. 2010). As such, it controlled the proposed
sale of the Lines (which were to be sold for an amount that was
v. Anrig, 728 F.2d 30, 32 (1st Cir. 1984) (Breyer, J.). In any
event, there is no unfairness here: the dispositive ground was
briefed and argued both in the district court and in this court.
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less than the amount of debt secured by its lien). Through the
Second Amendment, the FRA approved the sale of the Lines and waived
its lien. With respect to consideration, the FRA required, among
other things, that the proceeds from the sale be paid to an "escrow
agent"5 for the special purpose of distributing those funds to the
parties enumerated in Section 3.b.ii. of the Second Amendment upon
perfection of the FRA's replacement lien. Cf. Dean Witter Reynolds
Inc. v. Variable Annuity Life Ins. Co., 373 F.3d 1100, 1108 (10th
Cir. 2004) (explaining that placement of "monies . . . in accounts
for certain specific purposes, such as escrow accounts" may
establish bailment at common law); Lawrence v. Lincoln Cty. Tr.
Co., 131 A. 863, 867 (Me. 1926) (similar).
Whatever the proper label for this type of transaction,
the bottom line is that the debtor could not have put the proceeds
to any use that was not authorized by the FRA under the terms of
the Second Amendment. Pertinently for present purposes, the Second
Amendment had the effect of forbidding the debtor from using the
5
The term "escrow" is often used to describe "[a]n account
held in trust or as security." Black's Law Dictionary, 662 (10th
ed. 2014). Although the Second Amendment can be read to allow the
selection of a third party to serve as escrow agent for the purpose
of making the specific distributions, it appears from the record
that the debtor itself served this function. In all events,
nothing turns on the identity of the party serving this function,
and the Trustee has not alleged that the failure to appoint an
independent escrow agent was in any way adverse to the rights of
the bankruptcy estate.
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proceeds to pay general creditors save for the approximately
$1,000,000 that was earmarked for accounts payable.
Having determined that, under Maine law, the waterfall
provision created a relationship resembling a bailment, our
analysis must proceed under applicable federal law, that is, under
section 544(b). As the Supreme Court has explained in construing
similar language under section 547(b), the term "'property of the
debtor' . . . is best understood as that property that would have
been part of the estate had it not been transferred before the
commencement of the bankruptcy proceedings." Begier v. IRS, 496
U.S. 53, 58 (1990); see Stettner v. Smith, (In re IFS Fin. Corp.),
669 F.3d 255, 261 (5th Cir. 2012) (applying Begier in the section
544(b)(1) context). In other words, "[a] bankruptcy estate cannot
succeed to a greater interest in property than the debtor held
prior to bankruptcy." NTA, LLC v. Concourse Holding Co. (In re
NTA, LLC), 380 F.3d 523, 528 (1st Cir. 2004) (citing 11 U.S.C. §
541(d)).
"[T]he principal determinant of whether the debtor has
'an interest' in the property" is "the degree of control a debtor
exercises over the property transferred." MBNA Am. Bank, N.A. v.
Meoli (In re Wells), 561 F.3d 633, 635 (6th Cir. 2009) (quoting
McLemore v. Third Nat'l Bank (In re Montgomery), 983 F.2d 1389,
1395 (6th Cir. 1993)); accord Southmark Corp. v. Grosz (In re
Southmark Corp.), 49 F.3d 1111, 1116-17 & n.16-17 (5th Cir. 1995).
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So, for example, a bank account used by a debtor to pay general
creditors of its own choosing may be avoidable, even if the bank
account is in another person's name. See Riley v. Nat'l Lumber
Co. (In re Reale), 584 F.3d 27, 31 (1st Cir. 2009). By contrast,
property is not part of the bankruptcy estate when "the debtor
merely receives [it] in order to deliver it to its intended
recipient without any control or ownership over it." City of
Springfield v. Ostrander (In re LAN Tamers, Inc.), 329 F.3d 204,
210 (1st Cir. 2003). So, for example, if a debtor incurs health-
care expenses covered by insurance, and the insurance company sends
payment to the debtor before the debtor pays the health-care
provider, the insurer's payments would not be property recoverable
by the debtor's creditors. See id. (citing S. Rep. No. 95-989, at
82 (1978), as reprinted in 1978 U.S.C.C.A.N. 5787, 5868; H.R. Rep.
No. 95-595 (1978), at 368, as reprinted in 1978 U.S.C.C.A.N. 5963,
6324). It follows that where, as here, the debtor holds funds as
a mere disbursing agent pursuant to a contract that prevents it
from putting the funds to any use other than that designated in
the contract, the trustee cannot avoid the debtor's transfer of
the funds in compliance with the contract. See Lyon v. Contech
Constr. Prods., Inc. (In re Computrex, Inc.), 403 F.3d 807, 811,
813 (6th Cir. 2005); see also Old Republic Nat'l Title Ins. Co. v.
Tyler (In re Dameron), 155 F.3d 718, 722-23 (4th Cir. 1998).
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These limitations on the scope of the bankruptcy estate
make good commercial sense. They prevent unsecured creditors from
sharing in funds that the debtor could not have retained for its
own use. See In re LAN Tamers, 329 F.3d at 215. By the same
token, such limitations are consistent with the Supreme Court's
admonition that the law "does not authorize a trustee to distribute
other people's property among a bankrupt's creditors." Pearlman
v. Reliance Ins. Co., 371 U.S. 132, 135-36 (1962).
The upshot is that the debtor was a mere "transfer
station along the road to payment" of the parties specified under
the waterfall provision. In re Computrex, 403 F.3d at 811(citation omitted). Thus, it lacked a cognizable property interest
in the waterfall disbursement paid to Wheeling. See id.Consequently, that disbursement is not avoidable under section
544(b).
In an effort to blunt the force of this reasoning, the
Trustee relies heavily on the use of the disbursements to pay down
the debtor's indebtedness. He attempts to draw an analogy to
preferential transfer cases under section 547(b) in which third
parties pay off general creditors as part of the purchase price of
a debtor's assets. See, e.g., Warsco v. Preferred Tech. Grp., 258
F.3d 557, 565-66 (7th Cir. 2001); Buckley v. Jeld-Wen, Inc. (In
re Interior Wood Prods. Co.), 986 F.2d 228, 231 (8th Cir. 1993);
Feltman v. Bd. of Cty. Comm'rs. of Metro. Dade Cty. (In re S.E.L.
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Maduro (Fla.), Inc.), 205 B.R. 987, 991-92 (Bankr.S.D.Fla. 1997).
The Trustee says that this case is of the same genre because the
Lines were sold to a third party and some (but not all) of the
debtor's creditors received portions of the sale proceeds to
satisfy existing debts.
We find this proffered analogy unpersuasive. The
preferential transfer cases hawked by the Trustee rest on the
notion that "[if] the funds the third party used to pay the
creditor were consideration for the debtor's sale of its assets,"
then those funds are considered "property" of the estate because
they "would have been available for distribution" to the general
pool of creditors "had they not been transferred." Warsco, 258
F.3d at 565; cf. Begier, 496 U.S. at 58 (explaining bankruptcy
code's "central policy" of ensuring "[e]quality of distribution
among creditors").
The case at hand is a horse of a quite different hue:
unlike in these preferential transfer cases, the Lines were not
"assets" that belonged outright to the debtor prior to consummation
of the relevant transactions but, rather, were subject to the FRA's
mortgage and lien. See 14 M.R.S.A. § 3572(2). As the Trustee
readily acknowledges, "the FRA would have been entitled to the
proceeds" from a sale of the Lines "but for" the Second Amendment.
And although the FRA granted a limited waiver of its lien, it
conditioned that waiver on the debtor's distribution of the
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proceeds in compliance with the Second Amendment's waterfall
provision. The FRA made a choice to allocate the proceeds to which
it was entitled among certain of the debtor's creditors, an
allocation that it apparently concluded was "equitable and in the
overall best interest of the United States."
Seen in this light, it is readily apparent that this is
not a case in which a debtor decides to sell his assets and divert
the proceeds to pay certain creditors to the detriment of others.
Instead, it is a case in which a senior lienholder imposes
conditions that preclude the debtor from exercising effective
control over the sale proceeds. Accordingly, the waterfall
disbursement to Wheeling did not consist of property of the
debtor's estate. See In re Computrex, 403 F.3d at 813.
The Trustee nonetheless insists that other averments in
the complaint render his allegations about the debtor's control
over the waterfall disbursements plausible. As he sees it, the
debtor "could not have 'paid' [Wheeling] if it did not have control
or dominion over the proceeds." The fly in this ointment is that
the Trustee mistakenly equates the debtor's possession of the sale
proceeds with its control over those proceeds. The mere fact that
the debtor briefly possessed the sale proceeds (apparently as an
escrow agent) does not mean that it had any discretion to use those
proceeds as it saw fit.
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Were the Trustee's reasoning valid, any property
possessed by a bailee, however fleetingly, would become property
of that bailee's estate in a bankruptcy proceeding. This
proposition is untenable. The law is luminously clear that, in
the absence of a state statute to the contrary — and no such
statute has been cited here — "if property is in a debtor's hands
as bailee or agent," that property is not recoverable by the
bankruptcy trustee. 5 Collier on Bankruptcy ¶ 541.05 (A.N. Resnick
& H.J. Sommer, eds., 16th ed. 2017); see Kitchen v. Boyd (In re
Newpower), 233 F.3d 922, 933 (6th Cir. 2000); Torkelson v. Maggio
(In re The Guild & Gallery Plus, Inc.), 72 F.3d 1171, 1180 (3d
Cir. 1996). Consequently, we reject the Trustee's flawed attempt
to equate "possession" with "control."
Undaunted, the Trustee tries to attach decretory
significance to the fact that the FRA received only $2,400,000 or
so from the sale of the Lines (more than $30,000,000 less than the
total of the loan balance, plus incurred interest and penalties),
while the 2003 Investors received payment in full. The Trustee
suggests that this fact shows that the debtor, not the FRA, had
control over the sale proceeds. But this suggestion represents
magical thinking: the debtor could never have sold the Lines, let
alone decided how to distribute the sale proceeds, without the
FRA's approval. That the FRA chose to structure the waterfall
disbursements in a way that favored the 2003 Investors may well be
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an indication that the 2003 Investors had some leverage; it is
not, however, an indication that the debtor had control over the
sale proceeds.
We recognize that the FRA's decision to divert the
proceeds of the sale to less senior creditors may seem unusual,
but the FRA is not a typical transacting party. Rather, the FRA
is an executive agency of the United States, which employs its
lending program to maintain and improve the nation's railroads.
See 45 U.S.C. § 822. Here, it agreed to a loan modification that
it deemed to be in the national interest; and in structuring that
modification, it presumably determined that the national interest
would be best served by distributing the sale proceeds in
accordance with the waterfall provision. We have no reason to
believe that it would have surrendered its security interest in
the Lines otherwise. To permit the Trustee retroactively to unwind
this transaction would simply second-guess the FRA and disturb the
balance that it sought to strike without any principled basis for
doing so.
In a last ditch attempt to salvage his complaint, the
Trustee points to other allegations in the complaint that, in his
view, make his claim plausible. He emphasizes, for instance, the
complaint's allegations that the waterfall disbursements
"consisted entirely of unencumbered assets" belonging to the
debtor at the time of payment. The problem, though, is that the
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Trustee gives too much weight to conclusory statements and
rhetorical flourishes. Plausibility demands that a pleader offer
more substantial stuff. See Iqbal, 556 U.S. at 678. As the
Supreme Court has explained, "'labels and conclusions' or 'a
formulaic recitation of the elements of a cause of action will not
do.'" Id. (quoting Twombly, 550 U.S. at 555). Nor will "bald
assertion[s]" satisfy the plausibility standard. A.G. ex vel.
Maddox, 732 F.3d at 80.
In this instance, the conclusory statements and
rhetorical flourishes contained in the complaint are belied by the
cold, hard facts. Under the plausibility standard, fairly applied,
the complaint does not state a claim upon which relief can be
granted.
Teetering on the brink of defeat, the Trustee scrambles
to attain firmer footing by switching the subject. He contends
that he should at least have been given leave to amend his
complaint pursuant to Bankruptcy Rule 7015. This contention gains
him no ground.
Bankruptcy Rule 7015 employs Rule 15 of the Federal Rules
of Civil Procedure as the "mechanism for adjudicating motions to
amend a pleading in the bankruptcy context." In re Curran, 855
F.3d at 27. Subject to the exceptions not pertinent here, Rule 15
authorizes amendment only by leave of court. See Fed. R. Civ. P.
15(a)(2). Though a "court should freely give leave when justice
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so requires," id., it has discretion to deny such a request for
reasons including "undue delay," "bad faith or dilatory motive,"
"undue prejudice," or "futility of amendment," Foman v. Davis, 371
U.S. 178, 182 (1962). We review denial of leave to amend for abuse
of that discretion. See In re Curran, 855 F.3d at 28.
To begin, the Trustee requested leave to amend for the
first time in the district court. He never asked for any such
largesse in the bankruptcy court. Ordinarily, a party must "seek
any relief that might fairly have been thought available" in the
nisi prius court, on pain of waiver. Beaulieu v. IRS, 865 F.2d
1351, 1352 (1st Cir. 1989) (Aldrich, J.); accord Vega-Rodriguez v.
P.R. Tel. Co., 110 F.3d 174, 184 (1st Cir. 1997). The Trustee
fails to articulate any reason sufficient to warrant a departure
from this prudential principle.
Even if we were disposed to overlook this waiver — and
we are not — the Trustee has not identified any other or further
factual allegations that could be set out in an amended complaint
that would suffice to revivify his failed avoidance claim. The
terms of the Second Amendment are clear and, on this record, leave
to amend would appear to be "an empty exercise." Vega-Rodriguez,
110 F.3d at 184. Consequently, the district court neither lapsed
into error nor abused its discretion in rejecting the Trustee's
belated request for leave to amend his complaint. See In re
Curran, 855 F.3d at 28-29 (denying leave to amend as futile because
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of plaintiff's failure to allege additional facts that would render
claim plausible); Coyne v. City of Somerville, 972 F.2d 440, 446
(1st Cir. 1992) (similar).
III. CONCLUSION
We need go no further. For the reasons elucidated above,
the dismissal of the Trustee's complaint is
Affirmed.
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