Don’t Throw The Broker Out With The Bathwater

Hiking the bond requirement won’t fix industry’s ills

By Henry E. Seaton
October 2010
Reprinted /

Q: We are a small carrier who occasionally hires other companies to transport our hometown shipper’s freight when its need for service spikes beyond our capacity. I understand the Transportation Intermediaries Association and the Owner-Operator Independent Drivers Association are supporting legislation that would require carriers and brokers to post a $100,000 surety bond if they hire and pay other carriers to transport freight. We need the flexibility to subcontract freight, but cannot afford the bond. Is increasing the bond on everybody the only way to address the problem of unpaid freight charges?

A: The problem of crooked and/or undercapitalized middlemen is systemic. Carriers are not paid their freight charges because scam artists can play the system, collect money from shippers or lead brokers and abscond with the proceeds, stiffing the carriers they hire. Also, the industry is replete with middlemen who do not segregate freight charges into a constructive trust for benefit of the carrier and end up spending or pledging as their receivables monies that don’t belong to them.

This is not a new problem, and it is not the first time Congress has been asked to look at the issue. But the problem has festered as typically small carriers cheated out of their freight charges have sued shippers and have been dragged into protracted bankruptcies to prove their ultimate right of payment against the shipper and/or the broker’s secured creditor.

Requiring freight charges to be held in escrow is the solution.

A solution to this problem is long overdue, and the fact that the TIA and OOIDA can agree on anything is probably a good start. But upping the bond is no panacea for the problem, and it will have an anticompetitive effect on small brokers and carriers who otherwise are prepared to meet the requirements of the law under statutory penalty.

The broker regulations have not been changed substantially in 50 years. The broker is required by law to keep an accounting of payments and segregate receipts, and yet the regulations simply do not have any teeth and never have been enforced.

Recognized case law holds that a broker should receive the payment of freight charges in trust to the extent it is owed to the motor carrier and not pledge the funds to a bank or factors to secure some other trade or business. (See Parker Motor Freight, Inc. v. Fifth Third Bank, 116 F.3d 1137 [6th Cir. 1997].) Similarly, there is case law that says that interlining carriers should receive the payment from the shipper in trust and transmit the money to the performing carrier without cross-collateralization.

What would be more effective than raising the bond would be a simple statute that provided any carrier, broker or other entity who received the payment of freight charges should receive those funds in trust or escrow and be required to pay the performing carrier upon receipt unless it previously had paid the carrier from nonescrowed funds. If this sounds complex, it is simply what every lawyer has to do when handling clients’ funds under the penalty of a charge of embezzlement.

A $100,000 bond standing alone does not begin to address the problem. Our firm has been involved in numerous seven-figure bankruptcies in which “sophisticated” brokers spent carrier receivables to buy everything from computer systems to tractors and trailers for their carrier affiliates, only then to plead insolvency and stupidity as a defense. In one case, a broker acting as the agent for all of the major airlines filed bankruptcy owing $10 million – most of which it already had spent – to motor carriers, leaving the carriers and the airlines to litigate over the shortfall.

Currently, we are involved in a major bankruptcy for 40 motor carriers involving a major shipper that had a broker affiliate. The senior vice president of the broker affiliate candidly admitted he was told within 90 days of bankruptcy to delay paying carriers so that the parent could conserve cash to pay the secured creditors.

If the TIA and OOIDA want to stop the scourge of double brokerage, the first step is to ensure that the truckload carrier making pickup issues the bill of lading and signs the shipper’s documents in its own name, and that the shipper matches the name of the carrier provided by the broker with the name on the door of the cab, or knows the difference before the load leaves the dock. (See “Who’s Got the Freight?” CCJ, February 2010.) If we only could ensure by law that the carrier issues the bill of lading and that intermediaries receive freight charges in trust, our industry would be better off, and there would be no burden of an increased bond.

In sum, I think small carriers and brokers will have trouble getting insurers and banks to underwrite $100,000 bonds. As a lawyer, I know the difference between my money and my client’s money and the value of a legally required escrow account to segregate out the difference.

Article printed from Commercial Carrier Journal:
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