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MM&A, which filed for creditor protection this week.Peter Power/The Globe and Mail

The Quebec government says it can jump to the front of the line of the Montreal, Maine & Atlantic railway creditors seeking millions, to compensate the Lac-Mégantic derailment victims and cover its cleanup bill. But legal experts aren't so sure.

Quebec is counting on the environmental provisions of the federal Companies' Creditors Arrangement Act to get repaid by the Canadian subsidiary of MM&A, which listed $48-million in liabilities but only $18-million in assets in its bankruptcy filing. However, that recourse may not be as far-reaching as the government suggested.

This would be a nasty surprise for Quebeckers. They were told a week ago by Environment Minister Yves-François Blanchet they would not be stuck with the decontamination costs, which MM&A has pegged at around $200-million in court documents.

The minister responsible for the Eastern Townships, Réjean Hébert, played down that promise in a news conference in Lac-Mégantic on Thursday. He nonetheless asserted once more that Quebec will become a secured creditor in MM&A's Canadian bankruptcy proceedings. This would allow the government to precede the company's unpaid suppliers and the claimants who seek compensation from the rail crash that killed 47 people. But that is "not a slam-dunk case," said David Ullmann, an insolvency lawyer at Minden Gross LLP.

"There have been a few cases where the governments have not necessarily enjoyed the priority they alleged they had," Mr. Ullmann said. "This will likely result in some litigation on who gets what priority over the assets."

MM&A's filing only identifies the governments as "potential secured creditors."

Moreover, the conditions under which Quebec would get priority over other claimants are narrowly defined by the creditors' arrangement act. The government can only claim a privileged status on the land and property where the environmental disaster occurred, explained two other insolvency experts.

"Even if the railway owns vast assets somewhere else, but that is not where the disaster happened, then the government doesn't get priority over those. It can only lay claims on the property at the centre of the environmental cleanup," said David Bish, a partner at Torys LLP.

Also, the contaminated land or buildings must be owned by the company that sought bankruptcy protection. In Lac-Mégantic, that doesn't leave much; only the tracks and the land under it are listed as part of the railway's Canadian assets. Quebec disagrees. "That will have to be debated," said Joanne Marceau, spokesperson for the Minister of Justice.

Ms. Marceau refused to say what other recourse Quebec might have to pay for the cleanup now overseen by the Pomerleau construction firm. Nor did she reveal whether Quebec will seek funds from the railway's parent company, which is undertaking parallel bankruptcy proceedings in the United States. It is in better shape, with assets of $50-million to 100-million and liabilities estimated between $1-million to $10-million.

"We are not going to show our cards right away," Ms. Marceau said.

In Canada, the bankruptcy proceedings got off to a rocky start as the Quebec Superior Court judge who granted the creditor protection to the Canadian subsidiary made some harsh comments on MM&A's management.

"The tribunal is not impressed at all by the way MM&A behaved," Justice Martin Castonguay said. He granted the stay of proceedings.

"Since the beginning of the events, their conduct has been totally lamentable," he added.

The judge initially excluded the railway's directors from the court's protection on the grounds that directors should "act in good faith" – and he apparently felt they hadn't. But he later changed his mind when a MM&A lawyer pointed out that allowing lawsuits to proceed against the directors might deplete the company's $25-million insurance policy.

Justice Castonguay then ordered a stay of proceedings against the directors, but only for claims pertaining to the derailment. This would allow laid-off employees to seek compensation for unpaid wages and vacation pay, a situation the Steel Workers Union has called a "theft."

"I find it scandalous when a company doesn't pay its employees," the judge noted.

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