Don’t confuse carriers and brokers

Q I understand that a motor carrier may now arrange for transportation that it does not itself provide. Is it true that a motor carrier does not need a broker’s license to do this?

A Yes. The 1995 ICC termination law broadened the definition of transportation services a motor carrier can provide to include arranging for the receipt, delivery and interchange of property. A broker also arranges transportation by motor carriers, but carriers and brokers have entirely different duties, obligations and responsibilities.

A broker is not an asset-based provider of transportation and does not provide over-the-road transportation. Nor is a broker required to maintain personal injury or property damage insurance or cargo coverage.

Unlike a carrier, a property broker is not liable under the Carmack Amendment for loss or damage to a shipment in transit. Unless a broker accepts additional liability by contract, it has no cargo loss or damage exposure unless a party can establish negligent entrustment.

Regulations prohibit a broker from representing itself as a carrier. Moreover, brokers must maintain accounting records that show receipts of freight charges and payments to carriers on an invoice-by-invoice basis. Brokers also must segregate brokerage accounts from other businesses in which they might be engaged. To meet financial responsibility requirements, a broker needs only to post a $10,000 bond or trust agreement.

Carriers, however, accept full responsibility for the safe delivery of shipments tendered to them for transportation. When a carrier arranges for another carrier to handle all or part of the movement, it typically issues a through bill of lading on which its own name appears as the originating carrier of record. A shipper can file a loss or damage claim with the carrier of record whether or not the shipment was in that carrier’s possession and control at the time.

Under both federal and state laws, the originating carrier is entitled to recover from the connecting carrier if the loss occurred while the shipment was in the other carrier’s possession. Ordinarily, therefore, neither a broker nor an originating carrier will bear ultimate responsibility for loss or damage caused by a carrier it retains. You can bet, however, that an aggressive plaintiff lawyer will name either in a lawsuit.

A connecting carrier or “subhauler” gets its portion of the freight charges from the originating carrier and has no recourse to the shipper. Developing case law suggests that the origin or “arranging” carrier should receive the payment of freight charges owed a joint line partner in a constructive trust. This “conduit theory” gives connecting carriers important collection rights, especially in a bankruptcy where a priority claim is particularly important.

Carriers that do business with brokers may have several avenues for collection. In fact, the shipper may be liable to the carrier even if it paid the broker. Several circuit courts have held that – absent an agreement to the contrary – the bill of lading gives the carrier of record recourse to the consignor for freight charges when the broker does not pay up.

Carriers also may be able to rely on “constructive trust” theories to recover money paid by the shipper to the broker. The accounting and segregating regulations applicable to brokers help establish that they, like interlining carriers, should receive freight charges in trust and pay carriers with the proceeds.

At least one court has recognized that carriers may be more than just general unsecured creditors of property brokers. Further development of constructive trust theory could help carriers pierce the corporate veil when the owners of defunct brokers cannot explain what they did with the shipper’s money.

Consider carefully the legal status of a party offering you a load. The differences between carriers and brokers can be important to you.

Henry Seaton is a lawyer who represents carriers in contract disputes, collection matters, cargo claims and insurance questions. E-mail hseaton@eTrucker.com.