A breach of trust

Federal Motor Carrier Safety Administration is seeking comments by Feb. 22 regarding whether additional regulations for property brokers of household goods are needed and, if so, what they should include. An advance notice of proposed rulemaking was issued in response to a petition from the American Moving and Storage Association. For a copy, visit this site and search Docket No. 76672.

A foreman at Woodinville, Wash.-based Nationwide Moving System has been sentenced by the U.S. District Court in Tacoma, Wash., for his role in a scheme to extort money from more than 50 customers by low-balling moving estimates and later charging large amounts after the company had the customers’ possessions held hostage, according to the U.S. Department of Transportation Office of Inspector General. Martin Kirk was sentenced to 15 months in prison, 36 months supervised release and $21,575 in fees and restitution. Nationwide’s owner and four employees were scheduled for sentencing later last month.

The owner of a Denver-based freight brokerage has been sentenced for defrauding trucking companies by failing to remit freight charges and thwarting carriers’ collection efforts by relocating and changing the name of his firm and by providing fictitious motor carrier numbers and false surety bonds, the DOT OIG said. David Richard Shubert, owner and manager of Shubert Corporation, pleaded guilty and was sentenced by the U.S. District Court in Denver to 21 months in prison, three years supervised release and $5,869 in restitution.

Q We are a motor carrier who has filed for a broker’s license in the name of an affiliate. We have received several solicitations from vendors offering to post property broker trust fund agreements. I thought financial institutions, as trustees of these bonds, were supposed to have $10,000 in collateral and were required to make good faith decisions on the merits of claims. One company in particular states: “We don’t pay without your OK” (absent a court order). It states its goal is to protect the broker’s money at all times, and it offers seven plans – only two of which require the posting of $10,000 in cash collateral or a revocable letter of credit for the full amount. The other plans require either initial partial funding or some sort of security interest in broker receivables. Can this satisfy the regulations?

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A In my opinion, property broker’s trust programs of this type are an abuse of the financial responsibility obligations imposed by statute and regulation that has been allowed to go unchecked by the Federal Motor Carrier Safety Administration. The property broker’s bond trust agreement (Form BMC-85) was established in 1987 by the Interstate Commerce Commission as an alternative to the broker’s surety bond requirement because of the difficulty brokers encountered in obtaining bonds from the insurance industry.

In promulgating Form BMC-85 to be used by banks and financial institutions when complying with the $10,000 requirement, the ICC was careful to address both the collateral requirement of the trust and the question of good faith. The trust fund agreement that must be posted by each and every financial institution which serves as a trustee expressly provides:

“Trustee acknowledges receipt of the sum of Ten Thousand Dollars ($10,000), to be held in trust under the terms and conditions set forth herein.”

This language does not contemplate partial funding of a broker’s trust fund or alternative collateral. The trust fund agreement is not a guarantee or alternative insurance product, and the prescribed filing clearly requires the trustee to be in receipt of the entire $10,000 principal – known as the corpus – and to insist upon replenishment of the full corpus within 30 days of payment of any claim. Partial funding is neither authorized nor permitted.

Also, the trust fund agreement is clear with respect to the duties and obligations of the trustee. It provides that the trustee shall pay up to $10,000 directly to the motor carrier any sums the trustee “in good faith” determines the broker has failed to pay and legally owes. The standard of “good faith” is well defined as a legal concept in the context of insurance law and with respect to the duties of an honest escrow agent. A trustee acting in good faith cannot be a partisan, but must exercise independent and informed judgment.

I cannot see how one can exercise independent good faith judgment over distribution of a trust while advertising that its goal is to protect one adversary, making voluntary payment contingent upon its approval regardless of the facts.

In this regard, I am aware of numerous complaints from carriers in obtaining prompt payment and straight answers from different trustees who post BMC-85s with the FMCSA. The complaints range from “they just don’t pay” to “they claim the funds were exhausted but won’t tell me who they paid.” It is unfortunate, but the corpus on any one bond is so meager, issues of possible abuse in this area simply have not been litigated.

For most experienced carriers, the existence of a property broker’s bond or bank trust agreement is not valuable as a source of payment in the event of broker default. But it is of some value in determining whether an intermediary is at least marginally qualified. n

CF settles discrimination suit
Consolidated Freightways Corp. has settled a racial discrimination lawsuit for $2.75 million. CF – which filed for bankruptcy in 2002 and ceased operations last year – will pay 12 black former workers who complained of racial harassment and intimidation at the company’s facility in Kansas City, Mo. A federal bankruptcy court will review the settlement in light of Consolidated’s remaining assets. CF’s attorney says the company admits no wrongdoing but settled to avoid the expense of litigation.