CP Rail challenge to Lac-Megantic settlement rejected by judge

(Adds comments from lawyers)

By Allison Lampert

MONTREAL, July 13 (Reuters) - A Quebec judge rejected Canadian Pacific Railway Ltd's challenge to a settlement for victims of the Lac-Megantic crude-by-rail disaster on Monday, helping clear the way for compensation payments.

Parties previously named in a class action lawsuit, including closely-held Irving Oil, General Electric, Shell Oil Company, ConocoPhillips (NYSE: COP - news) , Marathon Oil and others, have agreed to contribute to a C$431 million ($338.28 million) compensation fund for victims of the July 6, 2013 rail disaster.

Forty-seven people were killed and the downtown core of the town was destroyed following the derailment of a train carrying Bakken crude oil.

CP transported the tank cars of oil involved in the accident to Montreal before handing them over to the now insolvent Montreal, Maine & Atlantic railway, which was operating the train at the time of the crash. Unlike other companies targeted by a Lac-Megantic-related class action lawsuit, CP did not agree to the settlement and challenged the provincial court's jurisdiction in approving the deal.

CP has 21 days to appeal Monday's rulings, said Patrice Benoit, lawyer for the defunct Montreal, Maine & Atlantic.

"I am very happy with the decision and think the 4,000 victims of the disaster will be as well," Benoit said.

CP, which said it is not responsible for the disaster and did not contribute to the settlement, is now the only company being threatened by the class action.

Joel Rochon, lawyer for the Quebec class action authorized in May, said in an email: "We have not finalized our damages calculations as yet in terms of CP, but the damages being sought against CP will be significant."

Before funds from the C$431 million settlement can be disbursed, a U.S. bankruptcy court in Maine must first confirm a related Chapter 11 plan for the American parent company of the Montreal, Maine & Atlantic railway.

"The plans are integrated and work together," explained Bob (Shanghai: 601169.SS - news) Keach, the railway's Chapter 11 trustee. "That's why both have to be confirmed."

CP could raise similar objections during a US hearing on August 20, Keach said. If no objections to, or appeals of the Canadian and American plans are filed, then "we'll be ready to distribute the funds to the victims" in the fall, he said.

($1 = 1.2741 Canadian dollars) (With additional writing by Allison Martell; Editing by Christian Plumb)