In what some experts say could be a conflict of interest, the CEO of the Montreal, Maine and Atlantic Railway’s parent company also sits on the board of directors of the railway’s second-largest creditor, which on Tuesday sued to ensure it is first to be paid from MMA’s ongoing bankruptcy proceedings.
Ed Burkhardt, CEO of MMA’s parent company, Rail World Inc., is on the board of the Wheeling and Lake Erie Railway, which is MMA’s second-largest creditor with a $6 million outstanding loan.
Wheeling and Lake Erie filed a lawsuit in U.S. Bankruptcy Court in Bangor asking Judge Louis Kornreich to become first in line to get back the $6 million loan that Wheeling gave MMA. That action is pending.
That’s not where the potential conflicts end. Larry Parsons, CEO of Wheeling and Lake Erie, is similarly a member of MMA’s board of directors.
To Matt Jacobson, former CEO of the St. Lawrence & Atlantic Railroad, that raised a red flag.
“Ed and Larry have interest in both railroads,” said Jacobson, who’s also former CEO of Maine & Co. and a former gubernatorial candidate. “It seems there’s at least the potential for conflict.”
Anthony Hatch, a railroad industry analyst based in New York, agreed.
While the arrangement Parsons and Burkhardt have was a bit unusual prior to MMA’s bankruptcy, Hatch said it wouldn’t have created any ethical conflicts because the two regional railroads don’t directly compete. However, that’s changed now that the two railroads are involved in MMA’s bankruptcy hearing, he said.
“I find this to be highly unusual,” said Hatch. Though, he added that the question of how to handle the situation is one for a bankruptcy expert, not a railroad industry analyst.
Reached on Friday, Burkhardt denied any conflict of interest exists for himself or Parsons. He said Wheeling’s board is not involved in the management of the company, and had no part in the decision to file the lawsuit. Burkhardt promised he would recuse himself from any deliberations should Wheeling’s board address the suit.
“They make their own policy decisions,” Burkhardt said of Wheeling’s management team, which answers to the board. “This matter has never been looked at by the board, but I would expect them [board members and management] to protect their financial interests in this matter.”
Burkhardt’s only financial benefit from sitting on Wheeling’s board is a small stipend for each quarterly board meeting he attends, he said. Burkhardt declined to disclose the amount of the stipend, and said he received no other direct financial benefits from his board membership.
Not all observers see a conflict of interest.
To William DeWitt, a former railroad executive and currently associate dean of Maine Maritime Academy’s Loeb-Sullivan School of International Business and Logistics, a conflict of interest implies a person personally profits from a situation, usually from unfair means. In this case, DeWitt doesn’t see Burkhardt or Parsons profiting from this situation, especially since the bankruptcy case is “under a microscope.”
“It is tremendously legally constrained,” DeWitt said. “So I’m struggling to figure out how a conflict of interest exists at this point in time.”
Parsons could not be reached for comment on Friday.
Robert Keach, the court-appointed trustee representing MMA, said he didn’t see any ethical issues with the board memberships.
“It’s pretty irrelevant,” Keach said. “It doesn’t mean anything in this context. Wheeling, like any other secured creditor, is protecting itself [with the lawsuit], and since the accident has been arm’s length to the company.
“In fact, they have been a pain. It’s not as if the ‘conflict’ is doing them any favors,” Keach added, calling it “an interesting historical fact.”
Burkhardt said he has not reviewed the situation with an attorney for any ethical issues, and has no immediate plans to do so. Membership of MMA’s board is a moot point, he said, because the trustee is now operating the company, not the board. Nor will the board resume its role with MMA.
“I don’t see a conflict,” Burkhardt said. “As a member of the board of the MMA I have no authority whatsoever. The trustee is in charge of MMA. The board has no affect on MMA Railway [at this point].”
Burkhardt said he doubted the Wheeling board would address Wheeling’s lawsuit, which he and Keach described as a legal maneuver typical in these kinds of proceedings.
A lawsuit “is not the kind of thing board members normally have an interest in the outcome of,” Burkhardt said.
Burkhardt said Parsons and Wheeling and Lake Erie have “bent over backwards” to assist MMA in whatever it was doing.
“Part of the background of his company is him making a $6 million loan,” Burkhardt said. “Since the bankruptcy occurred he has had no opportunity to help MMA in his capacity on MMA’s board.”
MMA’s future was shattered when an unmanned and runaway train parked on a main line outside Lac-Megantic, Quebec, and slammed into the center of that town on July 6, killing 47 people. The railway filed for bankruptcy protection about a month afterward, laying off more than 70 workers.
Agencies on both sides of the border are investigating the causes of the disaster. Lawsuits arising from it are expected to take years to play out in Canadian and U.S. courts. A Canadian court granted the railway permission to operate until Friday, Oct. 18, and is mulling a request to allow it to continue to Jan. 15, 2014.