Figuring out factoring

Supreme Court of California on Nov. 29 denied FedEx Ground Package System’s appeal of the state trial court’s decision finding the company’s drivers to be employees and not independent contractors. In August, the California Court of Appeals also denied the appeal in the landmark Estrada vs. FedEx Ground Package System Inc. case, and determined that the FedEx Ground drivers were entitled to reimbursement for about $6 million in additional expenses, bringing the total damages to about $11 million for 200 drivers.

Indiana contractor Gohmann Asphalt and Construction agreed to pay more than $8.2 million to settle federal and state claims alleging that the company fraudulently swapped samples of asphalt between 1997 and 2006 to inflate the amount paid on road projects by the Federal Highway Administration, Commonwealth of Kentucky, and State of Indiana.

Abdulfatah Osman Farah, a Somali citizen living in Kansas City, Mo., last month became the fifth co-defendant to plead guilty to participating in a conspiracy to provide fraudulent commercial driver’s licenses to large numbers of Somali and Bosnian nationals through testing at the South Central Career Center Truck Driver Training School in West Plains, Mo.

Todd Plumbing of Visalia, Calif., recently paid $5,625 to settle claims by the California Air Resources Board that the company failed to properly inspect its heavy-duty diesel trucks for compliance with the state’s smoke emissions standards.

Q We are a commercial factor that purchased the accounts receivable of small carriers, sending a factoring notice to their customers. One of our assignors who owes us substantial funds has convinced his customer to pay him directly, disregarding our notice. I know that is not legal; can you tell me why not?

AThe role of the factor in the supply chain payment loop frequently is misunderstood. This question provides an opportunity to explain the rights and remedies of the factor (a secured creditor who purchases accounts receivables) and of the payor of freight charges – such as a shipper or broker – who receives the notice of assignment (an account debtor).

Article 9 of the Uniform Commercial Code governs the rights and remedies of secured creditors. Section 9-406 provides that an account debtor may discharge its obligation to the carrier only until it receives a notice of assignment. Once it has been so notified, the shipper or broker as the payor “may not discharge the obligation by paying the assignee.”

So shippers’ and brokers’ accounts payable departments must watch factors’ notices of assignments closely and not pay carriers directly until after the factor releases its assignment in writing. The UCC allows an account debtor to question the assignment and notification at the outset. But if the account debtor fails to do so or if the assignment is shown to be valid anyway, it has no option but to honor the payment notification.

After the assignment notice, the account debtor must pay assigned freight charges that are due and owing to the carrier in accordance with its contractual terms. In essence, the factor stands in place of the carrier, and that’s the extent of its rights to payment. Unlike a payor of a negotiable instrument, the factor is not a “holder in due course.” It cannot claim a right to payment if a shipper or broker takes advantage of any counterclaim or offset rights it might have related to services that predated the freight charges in question. See Section 9-404(a).

Typically, factors are sophisticated lenders and fare much better than unsecured creditors if their primary debtors – motor carriers – become insolvent or bankrupt. They have secured lender status and frequently personal guarantees, pledges of unsecured collateral and holdbacks that are unavailable to the account debtor if the carrier for some reason has an uninsured payment obligation to it. And since a factor has no obligation to refund freight charge payments it receives, shippers and brokers understandably are reluctant to lose the important right of offset by failing to withhold payment when the circumstances require it.

Sophisticated factors should ensure the shipping documents prove their assignor was the authorized carrier to whom payment is due. Since the factor has no greater collection rights than its assignor, most factors will not risk purchasing broker invoices unless the carriers have been paid. Otherwise, unpaid carriers could trump their collective efforts on unpaid freight charges.


Michelin, Chinese suppliers settle copycat tire dispute
Michelin North America Inc. and China Manufacturers Alliance LLC announced Nov. 26 that they have entered into U.S. settlement agreement resolving the infringement of intellectual property rights. Details of the financial settlement were not disclosed.

The settlement follows a resolution between Greenville, S.C.-based Michelin and Shanghai Tire & Rubber (Group) Co. Ltd. (STRC) on multiple intellectual property litigations in various countries.

In return for Michelin dropping its legal actions for patent infringement and other issues, STRC and its related companies agreed they will change the tread patterns on relevant Double Coin and Dyna Trac brand tires. STRC and its affiliates also removed all versions of Michelin-copy-righted content from their websites.