Q One of the brokers we have used extensively just filed for bankruptcy protection, owing us tens of thousands of dollars in freight charges. Do I have any hope of seeing that money?
A Possibly. Shipments involving intermediaries typically are governed by multiple contracts that can – and often do – conflict, so you might have legal options in court. Bankruptcy proceedings, however, are traditionally unkind to motor carriers and other unsecured creditors. But if you are lucky, you might benefit from an emerging legal doctrine that can exclude freight charges from liens against the estates of bankrupt brokers.
In a simple, two-party transaction, the bill of lading clearly defines rights and responsibilities. Carriers must deliver goods free and clear of damage, and consignors or consignees must pay for those services. This arrangement does not, however, address the obligations of an intermediary for either freight charges or cargo claims. Instead, those obligations usually appear in collateral agreements that often create confusion over the intermediary’s role.
When acting as intermediaries, motor carriers and freight forwarders are liable for cargo loss and damage unless they obtain indemnity from the subcontracting party. But property brokers bear no liability for cargo loss and damage under federal law. Their duty is to arrange for transportation and to retain authorized and qualified carriers.
That’s the law. In the real world, these legal distinctions often are blurred. Carriers “broker” freight, while brokers guarantee damage-free delivery and allow their names to be used as carriers of record. The result is uncertainty in the event of default. For example:
· Must the intermediary pay the carrier even if it does not receive payment from the shipper?
· Does a shipper fulfill its bill of lading payment obligations to the carrier by paying the intermediary?
· Can or should a shipper deduct a cargo claim from an intermediary’s invoice knowing it’s offsetting losses against freight charges for carriers that had nothing to do with the losses?
There are no clear answers to any of these questions. But a legal doctrine emerging in several recent court decisions could alter the issues of freight charge collection and cargo liability drastically. Under the “conduit theory,” if freight charges are due to a subcontracting carrier, brokers and carriers hold those funds in what’s known as a constructive trust. In effect, the theory holds, funds received by intermediaries from shippers aren’t really the property of the intermediary; they belong to the carrier providing the service.
The conduit theory is an old concept, but it gained new life about four years ago in the 6th Circuit’s decision in Parker Motor Freight vs. Fifth Third Bank. In that case, the appeals court ruled that Parker’s collection rights as the carrier providing the service trumped the rights of an intermediary carrier’s secured lender regarding the intermediary’s freight charge receivables.
More recently, a federal district court in South Carolina extended the concept to freight charges held by property brokers. In TRM vs. Freight Peddlers, the judge treated freight charges differently than commissions on the grounds that federal regulations require brokers to segregate freight charge receivables from other funds and to maintain financial records on a shipment-by-shipment basis.
Intermediaries can benefit from the conduit theory as well. In New Prime vs. Professional Logistics Management, a Missouri court reasoned that if a broker is merely a “conduit” for freight charges, it’s not obliged to pay the carrier unless it receives funds from the shipper. And the 2nd Circuit in Prima USA vs. Westinghouse used the conduit theory to pass cargo liability through an intermediary to the underlying carrier.
The conduit theory is changing the legal framework for transactions involving intermediaries, and it may well help a carrier recover freight charges from a bankrupt broker. In general, however, shippers, carriers and intermediaries should assume that case law is unreliable and try to agree in advance to clearly defined roles.
