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As Debtwire’s legal analyst team discussed, a potential Chapter 11 filing by Brightline Trains Florida, which owns and operates a high-speed passenger rail system that spans between Miami and Orlando, could be subject to specific Bankruptcy Code provisions applicable to debtors that meet the definition of a railroad. If those provisions apply, no unsecured creditors committee would be appointed and, most notably, Brightline’s management would be displaced, and a trustee would be appointed to operate the company’s business.

In this article, we review two significant recent railroad Chapter 11 cases and discuss how each demonstrates the way the Bankruptcy Code’s special railroad provisions work in practice. We also note a third recent Chapter 11 filing by a railroad operator that was not subject to the Bankruptcy Code’s railroad provisions and explain why that railroad did not meet the Code’s definition of a railroad.

More specifically, we discuss the following three Chapter 11 cases.

San Luis & Rio Grande Railroad and Heritage Rail Leasing

The Chapter 11 cases of San Luis & Rio Grande Railroad (SLRG) and Heritage Rail Leasing, both of which were owned by Iowa Pacific Holdings (IPH), show that despite the distinctions between Chapter 11 cases involving railroad and non-railroad debtors, a trustee appointed to manage a railroad debtor during its Chapter 11 case often undertakes the same types of actions taken by debtors-in-possession in non-railroad liquidating cases.

The Chapter 11 case of SLRG, which owned and operated an approximately 150 mile long railroad and supported the transportation of grain, minerals, specialty rock products, and produce in Colorado, was not voluntary. It was commenced by the filing of an involuntary petition in October 2019 by three petitioning creditors.[1] SLRG, which already was in a receivership proceeding,[2] did not contest the petition. An order for relief was issued the following month, and on 30 December, the US Trustee appointed William A. Brandt, Jr. as trustee. Less than a week later, the trustee moved for permission to file bankruptcy petitions for four of SLRG’s subsidiaries: Grenada Railway; Massachusetts Coastal Railroad (Mass Coastal); Piedmont Railway; and Saratoga and North Creek Railway. The bankruptcy court granted that motion approximately 20 days later.

SLRG’s funded debt included a secured loan provided by Big Shoulders Capital, which had commenced the receivership proceeding noted above. According to Big Shoulders, the outstanding amount of its loan was USD 7.4m, and the loan was secured by, among other things, SLRG’s railroad tracks and equipment used in connection therewith, and real estate assets and fixtures, including buildings, bridges, and other improvements.

SLRG’s trustee operated in much the same way a debtor-in-possession would, including conducting multiple sales under section 363 of the Bankruptcy Code. For example, the trustee filed proposed bidding procedures for the sale of membership interests in Mass Coastal, which was an operating railroad that provided freight service to southeastern Massachusetts, and entered into a stalking horse agreement with Coastal Rail. The trustee held an auction, at which 61 bids were received. After the auction, the stalking horse bidder increased its initial offer to USD 2m and was named the winning bidder. The stalking horse bidder was an insider of the debtor, as defined in Bankruptcy Code section 101(31).

In addition, the trustee entered into a stalking horse asset purchase agreement with OmniTrax, whereby OmniTrax agreed to purchase substantially all of SLRG’s remaining assets and to continue freight service in the San Luis Valley at a purchase price of USD 5.75m, subject to higher and better bids. The trustee conducted an auction and after 61 rounds of bidding, KCVN was announced as having submitted the winning bid at a purchase price of USD 10.4m. After the bankruptcy court approved the sale, the trustee closed on the sale to Colorado Pacific Rio Grande Railroad, KCVN’s successor-in-interest. Colorado Pacific assumed the debtor’s “common carrier” status as an operating railroad with authorization from the Surface Transportation Board.

The trustee also investigated (i) actions taken by the receiver in the receivership proceeding[3] and (ii) Big Shoulders’ secured loan. The trustee commenced an adversary proceeding against Big Shoulders to avoid various indebtedness as a constructive fraudulent transfer and as unauthorized post-petition debt. The parties ultimately settled that litigation in exchange for a USD 3m reduction in Big Shoulders’ claim.

In addition, the trustee obtained bankruptcy court permission to incur USD 800,000 in secured post-petition financing (not referred to as DIP financing because SLRG was not a debtor-in-possession) from the San Luis Valley Development Resources Group & Council of Governments.

The trustee ultimately filed a plan of liquidation and, according to the disclosure statement, estimated that general unsecured creditors would be wiped out. The plan was confirmed and went effective on 1 May 2023.

Like SLRG, Heritage Rail Leasing was the subject of an involuntary Chapter 11 petition filed in the US Bankruptcy Court for the District of Colorado. At the time Heritage’s Chapter 11 case was commenced, its business was leasing its rolling stock,[4] primarily to other subsidiaries of its parent, IPH. However, Heritage had virtually no money and no revenue and, according to the trustee appointed in its case, it was poorly managed. Heritage’s rolling stock did not appear to be insured, maintained or protected from the elements, and it was parked in various places with no apparent arrangements with property owners as to storage fees.

The trustee further discovered that Heritage’s assets were pledged as collateral to secure debt of IPH. According to the trustee, 18 of the most valuable rolling stock had been pledged as collateral for a USD 3m loan from the Mississippi Department of Transportation (MDOT) to the Granada Railroad and, including the 18 rolling stock, a total of 76 railcars and locomotives were pledged as security for USD 5m in loans from Big Shoulders. As explained in its disclosure statement, Heritage’s “vintage railcars and locomotives were largely encumbered with large, defaulted loans and scattered” throughout the US. They were “exposed to the elements and vandalism and accruing storage fees in unspecified amounts.” Moreover, like SLRG, Heritage had been involved in a contested federal receivership case involving IPH and a number of affiliated entities. The receivership was terminated several months before the involuntary bankruptcy petition was filed.

The trustee conducted a series of asset sales pursuant to section 363 of the Bankruptcy Code. To sell Heritage’s assets free and clear of liens, claims, and encumbrances, the trustee entered into deals with Big Shoulders, which asserted an USD 8.4m claim that it argued was secured 76 of Heritage’s railcars and locomotives, and MDOT, which asserted a USD 1.4m claim secured by a lien on 18 railcars.

The trustee ultimately proposed a liquidating plan that preserved claims to be brought by a liquidating trustee, including claims to be brought against the receiver, Novo Advisors, and its professionals including Fox Rothschild, Lathrop Gage and Livingstone Partners. While general unsecured creditors were set to receive distributions, the trustee did not provide an estimate as to recoveries, which would depend on the amount of proceeds, if any, brought into the estate as a result of litigation. Heritage’s Chapter 11 plan was confirmed on 26 April 2022 and went into effect on 13 May.

As these two cases show, like debtors-in-possession, trustees appointed in railroad cases incur post-petition financing, submit proposed bidding procedures, conduct auctions, and enter into sale agreements. They also investigate potential claims on behalf of the debtor, negotiate with creditors, and enter into settlement agreements.

Searles Valley Minerals

Although not subject to the Bankruptcy Code’s railroad-specific provisions, it is also worth noting the Chapter 11 case of Searles Valley Minerals, filed on 15 June 2026. Skadden, Arps, Slate, Meagher & Flom, which has also represented Brightline, is counsel to the debtor in that case. Searles, together with its subsidiaries Trona Railway Company and Searles Domestic Water Company, entered Chapter 11 to stabilize operations and run a court-supervised section 363 sale following an unsuccessful prepetition marketing process. While Searles Valley Minerals is an industrial minerals producer, according to the debtors’ financial advisor Adrian Frankum of Ankura Consulting Group, Trona Railway owns and operates a private short-line railway that runs from the company’s facilities to an interconnect with the Union Pacific main line.

At first glance, Trona could appear to fit the Bankruptcy Code’s definition of a railroad; a “common carrier by railroad engaged in the transportation of individuals or property or owner of trackage facilities leased by such a common carrier.” However, it likely would not meet that definition because it is not a “common carrier,” which is generally understood to be a carrier that holds itself out to the general public to provide transportation for compensation. By contrast, Trona Railway does not appear to provide services to the general public, which understandably would take it outside the scope of the Code’s railroad-specific provisions that were largely designed to protect the public interest. Brightline, however, should meet the “common carrier” portion of the Bankruptcy Code’s railroad definition.

Divergent paths

The Brightline group could take a number of different paths in connection with a Chapter 11 filing. It could place Brightline Trains Florida in Chapter 11 to address its billions of dollars in funded debt, with a possible consequence that the Bankruptcy Code’s railroad-specific provisions would apply. Alternatively, it could commence a Chapter 11 case on behalf of non-railroad entities Brightline East and/or AAF Operations Holdings, to address funded debt held by those entities.

Regardless of which – if either – option Brightline ultimately chooses, the Chapter 11 cases and the appointed trustee could operate along the same paths with similar options, such as the ability to conduct asset sales, commence adversary proceedings, negotiate with creditors, and even incur post-petition financing.

Related Links (access required):

SLRG Disclosure Statement
Heritage Rail Leasing Disclosure Statement
Searles Valley Minerals Case Profile
Debtwire Dockets: Searles Valley Minerals
Debtwire Restructuring Database: Searles Valley Minerals 

Prior to joining Debtwire, Sara was a law clerk to two judges in the United States Bankruptcy Court, S.D.N.Y. and practiced in the Financial Restructuring Group at Clifford Chance, where she represented financial institutions (as secured and unsecured creditors, defendants in adversary proceedings, and participants in DIP financings) in high-profile restructurings. She also represented foreign representatives in Chapter 15 cross-border cases.

This article should not be relied upon to make investment decisions. Furthermore, this article is not intended and should not be construed as legal advice. ION Analytics does not provide any legal advice, and clients should consult with their own legal counsel for matters requiring legal advice. All information is sourced from either the public domain, ION Analytics data or intelligence, and ION Analytics cannot and does not verify or guarantee the adequacy, accuracy or completeness of any source document. No representation is made that it is current, complete or accurate. The information herein is not intended to be used as a basis for investing and does not constitute an offer to buy or sell any securities or investment strategy. The information herein is for informational purposes only and ION Analytics accepts no liability whatsoever for any direct or consequential loss arising from any use of the information contained herein.

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[1] The San Luis Central Railroad Co, South Middlecreek Road Association, and Ralco were the petitioning creditors.

[2] The receivership proceeding was pending in the US District Court for the Northern District of Illinois. On 18 October 2019, the District Court declared the involuntary petition to be in violation of the receivership order, and the receiver requested that the bankruptcy court dismiss the petition or abstain from considering the involuntary petition and excuse the receiver from complying with the Bankruptcy Code’s turnover requirements while the motion was pending. The receivership proceeding was ultimately terminated in favor of the bankruptcy case.

[3] According to the trustee, the receiver was party to a “sweetheart agreement” with the Internal Revenue Service (IRS) and Big Shoulders pursuant to which the SLRG became obligated on Iowa Pacific’s over USD 13m tax obligation, secured by a lien on all SLRG’s assets notwithstanding that SLRG only owed the IRS USD 429,644, all of which was unsecured. According to the disclosure statement, the trustee found that the receiver borrowed over USD 2m during his four-month tenure that significantly increased the principal amount of debt owing by SLRG to Big Shoulders. Also, the trustee found that the receiver was funding the receivership with operating cash from Mass Coastal, even though Big Shoulders did not have a security interest in any Mass Coastal assets.

[4] Rolling stock refers to vehicles (both powered and unpowered) that move on railroads, such as any railway vehicle that moves on a railway track, including freight and passenger cars, among other things.