Thursday, March 13, 2014

The $75,000 Bond is No Cure-All

The $75,000 Bond is No Cure-All
Henry E. Seaton, Esq.

MAP-21 requires any party which arranges for origin to destination shipments to hold either broker or freight forwarder authority and to post a $75,000 bond.  The new Act does not apply to exempt traffic, to shipments moving in intrastate commerce, or to joint line service in which a motor carrier either picks up or delivers the shipment in its own equipment.

The legislation was aimed at the transactional truckload market in which the majority of the intermediary abuse occurs.  Brokers and forwarders default on their payment obligations to carriers for two reasons:

            (1)        Malfeasance.  This legal term applies when a party intentionally commits an act which harms another.  Misrepresentation and fraud are by definition malfeasance and the transactional market has been replete with crooks who obtain a broker’s license, collect receivables with no intention of paying the underlying carriers, and escape with their ill gotten gains only to defraud the poor carrier who handled the freight and the shipper or lead broker who paid them.

            (2)        Misfeasance is the other form of broker abuse in which the brokers, through negligence, bad business or ignorance, considers the gross amount of the freight bill as its accounts receivable and the motor carrier as its general creditor.  Misfeasance frequently occurs when brokers misapprehend their obligations pursuant to the broker regulations.  49 C.F.R. 371 requires a broker to segregate its broker operations from any other business in which it has been engaged, and to keep records showing on a load-by-load basis when it bills the shipper, when it receives payment and when it transmits those payments to the carrier.

Brokers who “guarantee” payment to the underlying carrier, regardless of whether they are paid, and attempt to pay carriers on a first in, first out basis without sufficient independent reserves to pay all motor carriers if their largest shipper files bankruptcy, are bad credit risks and the source of carrier nonpayment on default.  Even worse credit risks are brokers who consider their gross receivables as their own personal property and attempt to cross-collateralize the face amount of each freight bill to secure loans for trucks, buildings, to play the stock market or to buy a new car.

In this context, when fully implemented, MAP-21 may provide additional valuable information about the owner of newly created brokers but the $75,000 bond alone is not going to cure the problem of broker malfeasance and misfeasance.  It is not unusual for brokers to file bankruptcy, owing millions of dollars to motor carriers, and once the $75,000 bond is exhausted, the carrier’s only hope of recovery is to defeat the broker’s secured creditor and to demand payment from the shipper under the prevailing case law in most Circuits.

Since most brokers don’t have fixed assets or inventory and are only solvent as long as their largest carrier does not declare bankruptcy, it is hard to handicap their creditworthiness.  As a result, the best credit advice I can give to carrier clients is as follows:

            (1)        Do not waive the broker regulations and require the broker to transmit payments to you upon receipt from its customer.

            (2)        Insist upon reasonable payment terms, preserving recourse to the broker’s customer upon default.

            (3)        Be diligent in checking out the payment history of brokers by carefully monitoring their Ansonia credit scores and other payment records.

            (4)        If at all possible, preserve lien rights, interest and attorney’s fees on delinquent accounts.

            (5)        Establish and monitor credit limits on all broker accounts – remember, nice guys finish last and under MAP-21 the $75,000 bond will be spread out pro rata among all the victims and is no guarantee of anything other than a partial payout.

No comments:

Post a Comment