When customers go bankrupt

The Council of the District of Columbia banned certain hazardous materials from being transported within 2.2 miles of the U.S. Capitol for 90 days. Carriers will be granted permits only if no viable alternate routes exist. But the council’s action – triggered by a recent release of chlorine gas after a train crash in Graniteville, S.C. – is aimed less at trucks than at the CSX Corp.’s freight rail line that passes within four blocks of the Capitol. The U.S. Department of Transportation said the council’s action “may violate provisions in the U.S. Constitution and federal laws on interstate commerce, the transportation of hazardous materials, and the railroad industry.”

U.S. District Judge Ronald Buckwalter dismissed a lawsuit against the Delaware River Joint Toll Bridge Commission over an increase in the per-axle fee imposed last year. Three trucking associations and a trucking company claimed that the increase wasn’t warranted because the commission had a $118 million surplus – nearly three times its annual operating budget. But the judge ruled that the parties do not have a private right of action to sue.

USF Corp. has filed a federal lawsuit against the Teamsters union and three union locals, accusing them of violating federal labor law and breaching the no-strike clause of its collective bargaining agreement when the Teamsters struck Red Star on May 21, 2004. USF shut down Red Star two days later. The company subsequently re-entered the Northeastern market in September with its USF Holland unit. The lawsuit was filed in the Northern District of New York.

Q We are a third-party logistics firm that provides substantial service for a shipper that recently filed a bankruptcy petition seeking Chapter 11 reorganization. The traffic manager states that we should not worry because we will be named a critical vendor and our pre-petition debts will be paid as long as we agree to continue to arrange for the transportation of the debtor-in-possession’s cargo. In our experience, nothing good has ever come out of a bankruptcy. Does critical vendor status offer us any protection?

Partner Insights
Information to advance your business from industry suppliers

A Your general observation is most often the rule. Carriers and brokers generally are treated as unsecured creditors in bankruptcy proceedings and usually see their freight charge receivables wiped out as of the date of the filing. Ultimately, unsecured creditors are lucky to receive a few cents on the dollar when the bankruptcy is finally wound up and the first shares go to the government, secured creditors, other creditors having priority and administrative costs.

Also, unsecured creditors may be subject to preference actions by the estate or the debtor-in-possession and may not get to keep even the belated payments they received from the bankrupt debtor within 90 days of the filing. Therefore, the “critical vendor status” you mentioned is a very important legal remedy for any unsecured creditor who qualifies.

Critical vendor provisions aren’t designed to benefit deserving creditors. Rather, they are intended to help the debtor-in-possession successfully reorganize and continue as a going business. Within the first few days of the filing of a Chapter 11 petition, a debtor will ask the court for a number of emergency orders to allow it to continue operations while a plan of reorganization is formulated. Interim financing must be approved, employees must be kept in place, insurance premiums must be paid and so on.

In this context, the bankruptcy law recognizes that the provision of necessary goods and services by critical vendors often is indispensable if the shipper is to reorganize. Such necessary suppliers may be unwilling to continue to service the debtor, however, unless their past debts are paid in full and satisfactory arrangements for continued payments during the reorganization are made. Now that truck and rail capacity is limited and bankrupt shippers have fewer transportation options, shippers, carriers and brokers may be able to negotiate for critical vendor status more easily than in the past.

However, a traffic manager’s verbal assurances clearly are not sufficient to achieve this status. You should retain counsel and move quickly to see that the proper motion is filed and approved by the bankruptcy judge. Be sure that proper credit terms are in place to guarantee payment of the post-petition services you provide as well. While the freight charges of post-petition carriers and brokers are paid by the estate as an administrative cost before pre-petition creditors, there is no guarantee that the debtor-in-possession can reorganize successfully and that even the administrative cost will be paid in full. Remember, critical vendor status is not often sought or granted. Good luck!

Owner sentenced in moving company scheme
The president of several moving companies based in Plantation, Fla., was sentenced in late January to 12.5 years in prison and three years’ supervised release for his role in a household moving scheme in which the moving companies offered low estimates and then fraudulently inflated the price of the move. If customers refused to pay the inflated price, the moving companies withheld delivery of their goods. The fraud totaled about $1.8 million and more than 1,000 victims over two years.

Yair Malol – who also was ordered to forfeit his interest in various assets, including his residence – was owner and president of Majesty Moving and Storage, America’s Best Movers, My Best Movers and Apollo Van Lines. Upon completion of his imprisonment, Malol must return to his native Israel. Jennifer Tafuri Vakin, a claims representative and secretary for two of the companies, was sentenced to six months’ imprisonment and three years’ supervised release.

The convictions resulted from a joint investigation of the FBI and the U.S. Department of Transportation’s Office of Inspector General.