Stipulated Damages Insufficient To Support Adequate Protection Claim
By Michael Enright
Although a secured lender was able to demonstrate that it had an interest in collateral that was entitled to adequate protection, its failure to prove the value of that collateral resulted in a zero recovery, which was affirmed on appeal. The decision comes in the Ch. 11 case of a railroad, and involved claims against the shipper of shale oil for its alleged failures in connection with its shipment of product by rail, after a catastrophic explosion that killed dozens of people in a small town in Quebec. The estate representative settled with the shipper, and the lender claimed an interest in the settlement proceeds, based on its security interests in certain contractual and regulatory rights of the debtor against the shipper. Although the court recognized the collateral included these indemnification rights, it was up to the lender to prove the value of those rights. The lender sought to rely on a stipulation with the estate representative which set the “net economic damages” associated with the contract claims, but the court held the lender’s reliance was misplaced, because the “net economic damages” stipulated to did not take into consideration potential defenses available to the shipper on the indemnification claims, among other things. Under the circumstances, the court concluded that the lender did not carry its burden of establishing the value of its collateral for purposes of obtaining a recovery from the settlement proceeds on account of its adequate protection rights. Wheeling & Lake Erie Railway Co. v. Keach, Case No. 18-00262 (D. Maine June 18, 2019). The decision is a good reminder that having an interest in collateral and proving its value are two different things, and Ch. 11 cases can provide particularly tricky scenarios where valuation is both important and very difficult to prove.