A Canadian/U.S. Comparison of All Things Rail and Considerations for Financing and Other Transactions

Transcription

1 A Canadian/U.S. Comparison of All Things Rail and Considerations for Financing and Other Transactions Jennifer Wasylyk Claire Murphy American Bar Association 2015 Annual Business Law Section Meeting Project Finance and Development Committee

2 Outline Regulatory Scheme in Canada and the U.S. Security over Railcars Insolvent Railway Companies Insurance Requirements Safety Regulations Vicarious Liability Cross-Border Considerations

3 Regulatory Scheme - Canada Generally, rail falls under federal jurisdiction of Transport Canada Canada Transportation Act, Part III Applies to inter-provincial rail operations and US rail operations that enter Canada Division II: Construction and Operation of Railways; Liability Insurance Division III: Financial Transactions involving Railway Companies or Rolling Stock Railway Safety Act Transportation of Dangerous Goods Act

4 Regulatory Scheme U.S. Staggers Act of 1980 Deregulated pricing of routes and services Permitted confidential contracts between railroads and shippers Allowed regulators to exempt certain traffic from regulation where unnecessary to prevent monopolistic behavior Left intact the antitrust exemption for railroads Post-Staggers Regulatory Environment Railroads set their own prices based on market forces Confidential shipping contracts Tariff rates (non-contract, based on distance & commodity) applied where competition is unavailable

5 Regulatory Scheme U.S. (cont.) Post-Staggers Regulatory Environment (cont.) Surface Transportation Board Jurisdiction over services and changes to infrastructure Can cap allowable rates in absence of competition But enforcement mechanism is arbitration Federal Railroad Administration Railroad safety federal and state inspectors Department of Transportation Jurisdiction over how materials are transported and standardization of equipment Environmental Protection Agency Transportation of hazardous materials

6 Security over Railcars - Canada Canada Transportation Act ( CTA ) Section 104: railway companies Section 105: rolling stock or accessories or appurtenances relating to rolling stock A deposit made under either section 104 or 105 is valid against all persons Personal Property Security Act ( PPSA ) Where railway operation is contained within one province, register under the applicable PPSA Where railcars have additions, such as racking or detachable assets, common practice to make PPSA registration

7 Security over Railcars Canada (cont.) Searches under the CTA Company name vs. collateral searches English and French search terms Registrations under the CTA Section 105 memoranda/summary filings Primary vs. secondary documents Primary: first document in a transaction or relationship Secondary: document related to primary document (amendment, assignment, release or discharge)

8 Security over Railcars U.S. Surface Transportation Board (STB): Recordation system for security interests in rolling stock Authorizing statute is 49 U.S.C Enumerates traditional forms of equipment obligations (written before adoption of UCC) Applies to private car lines and common carriers Notice to and effective against all persons When to file with the STB Rail Equipment: Steel wheels that ride on steel rails UCC filing may be appropriate where equipment is not engaged in interstate commerce (yards/factories)

9 Security over Railcars U.S. (cont.) When to file with the STB (cont.) STB is a lien registry, not a title registry Commonly used to register ownership Leasehold interests do not need to be filed with the STB, but are often filed anyway What to file with the STB Document must identify the interest, be signed by the debtor and identify the equipment Memoranda/summary filings are common Searches Equipment reporting marks and road numbers; party names Primary and secondary documents

10 Insolvent Railway Companies - Canada Insolvency provisions in the CTA Directors of insolvent railway company propose scheme of arrangement with creditors Scheme must be approved by ordinary shareholders and ¾ of creditors/preferred shareholders If railway company leases railway from another railway company, scheme must be approved by lessor railway company

11 Insolvent Railway Companies Canada (cont.) Companies Creditors Arrangement Act ( CCAA ) Restructuring act that applies to Canadian companies or companies doing business in Canada Specifically carves out certain corporate entities, including railway companies Lac-Mégantic case Applied doctrine of inherent jurisdiction of the courts Quebec Superior Court held that CCAA applied Canadian Pacific Railway Ltd. has challenged CCAA jurisdiction

12 Insolvent Railway Companies U.S. 11 U.S.C Rights afforded to secured parties and lessors with rights in rolling stock in equipment transactions Trustee has an opportunity to cure defaults, agree to make payments and retain and use the equipment 363 (automatic stay) and 363 (use/sale/lease of property) do not apply in railroad bankruptcy

13 Insurance Requirements - Canada Recent amendments: Safe and Accountable Rail Act Aimed at strengthening liability and compensation regime for railway companies transporting dangerous goods Based on polluter pays principle New minimum liability insurance requirements Shipper-funded fund for railway accidents involving crude oil Vicarious Liability Generally, no vicarious liability unless specific legislation relating thereto No vicarious liability legislation re: rail accidents, but vicarious liability uncertainty/concern remains

14 Insurance Requirements U.S. Liability and Initiative Operator is responsible for damages Railroads are common carriers required to transport hazardous materials Responsible for inspecting cars and maintaining track Most railroad accidents are a result of track failure Industry has been successful in self-imposed improvements to maintenance requirements/standards related to keeping cars on the tracks (reducing claims & costs) Decrease in derailments in 2014

15 Insurance Requirements U.S. (cont.) Insurance Requirements U.S. has no federal or state minimum All railroads purchase insurance Class I: Usually carry maximum available market insurance of $1.5B Self-insured retentions of about $25-$50MM Class II: Usually carry ~$25-$100MM Class III: Usually carry ~$5M Insurance Costs Commercially available insurance is insufficient to cover worst case scenario costs

16 Insurance Requirements U.S. (cont.) Proposed Solutions Federal law similar to Safe and Accountable Rail Act Tax oil shipments, limit liability, shift the risk NY: Financial guarantees from oil storage farms No-fault system (as with nuclear power) where contributions from interested companies help indemnify the industry More responsibility on shippers

17 Safety Regulations - Canada Railway Operating Certificate Regulations To obtain railway operating certificate, must meet baseline safety requirements Recent amendments to the Railway Safety Act Greater oversight and enforcement capacity Violation of Canadian Rail Operating Rules can result in immediate suspension of railway operating certificate Regulations Amending the Transportation of Dangerous Goods Regulations (TC 117 Tank Cars) New class of tank cars and retrofit requirements for existing tank cars used to transport flammable liquids Canada/US harmonization

18 Safety Regulations U.S. New DOT tank car mandates Apply to high-hazard flammable trains Cars built after October 2015 must meet DOT-117 specifications Risk-based retrofitting schedule to replace entire DOT- 111 fleet Braking High-hazard flammable unit trains must have ECP brakes by 2021 (for those carrying crude) or 2023 Operational Protocols 50 MPH speed limit in all areas; 40 MPH speed limit for not-yet-compliant trains in high-threat areas

19 Safety Regulations U.S. (cont.) New DOT tank car mandates (cont.) Routing Risk assessment and information sharing Classification Sampling/testing for unrefined petroleum products Federal Railroad Administration Rail Safety Improvement Act (2008) Railroads must meet specified track failure rates determined by products transported NOT location Positive Train Control

20 Cross-Border Considerations Registration of security interests where to register Not all insurance and safety regulations are harmonized Security Interests 49 U.S.C recognizes security interests by Canadian borrowers to Canadian lenders filed in Canada Canada recognizes security interests filed with the STB by U.S. borrowers to U.S. lenders Safety Regulations U.S. safety regs apply to all trains operating in the U.S. Cross-border shipments must be universally compliant Industry-imposed standards are universally applicable

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