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The Role of the Broker Conflicting Paradigms

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Borrow against gross receivables from bank ... v. Fifth Third Bank, 116 F.3d 1137 (6th Cir. 1997) (Motor carriers interest trumps the bank) ... – PowerPoint PPT presentation

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Title: The Role of the Broker Conflicting Paradigms


1
The Role of the Broker-Conflicting Paradigms
  • TCA 2007 Annual ConventionMarch 11-14,
    2007Bellagio ResortLas Vegas, Nevada

2
  • The field of intermediaries extends from
    integrated supply chain management to
    transactional brokers matching one load at a time
    on the internet.

3
  • While the scope is much more varied and complex,
    the principal role of the intermediary remains
    ill defined. As the NITL, the TIA and the ATA
    all promulgate lengthy contracts to address the
    issue, it is clear, There is no consensus over
    the role of the intermediary.
  • Is an intermediary a
  • Broker/Arranger or a Principal/Provider?
  • What difference does it make?

4
  • Is a freight intermediary like a stock broker or
    real estate agent who does his job by
    facilitating a transaction between two
    contracting principals the shipper, a buyer of
    transportation services, and the carrier, a
    seller?
  • Or
  • Is a freight intermediary just a different type
    of transportation service provider who by
    contract is liable to the shipper for safe
    delivery of cargo and liable to the carrier for
    freight charges regardless of whether it gets
    paid?

5
LEGAL BASIS
Broker / Arranger
Principal / Provider
  • Role established by common contract law and
    statutes of regulation 49 CFR 371
  • Broker arranges for contracts between buyer and
    sellers
  • Professional intermediary is like an insurance
    agent or real estate broker
  • Established by contract waiving statutes and
    regulation under '14101(b)
  • Principal enters contracts to provide goods or
    services, assumes liability and hires
    subcontractors
  • Frequently broker is merely substituted for
    carrier in shipper contracts.

6
GENERAL DUTIES
Principal / Provider
Broker / Arranger
  • Duty of good faith and due diligence
  • Arranger of transportation
  • Brings together buyers and sellers
  • Bill of lading is contract of haul
  • Assumes by contract carrier-like duties
  • (1) Payment of freight
  • charges
  • (2) Cargo claim liability
  • (3) Indemnity for BI PD arising out of
  • (4) Purports to take possession of cargo

7
  • Based on ones answer to this Fundamental
    dichotomy, all of the vexatious issues affecting
    intermediaries and model contracts can be sorted
    out

8
  • Can or should an intermediary act like a carrier
    accepting responsibility for providing
    transportation?
  • Can an intermediary accept primary responsibility
    for cargo claims?
  • Should a broker have the right to offset cargo
    claims against freight charges?
  • Should a broker accept ultimate liability for
    payment of freight charges?
  • Does the carrier have recourse to the shipper for
    payment of freight charges?
  • Can a broker pledge the gross amount of its
    freight invoices to its second lender or are only
    its commissions really its assets?
  • Do motor carriers have special rights when
    brokers file bankruptcy or are they just
    unsecured creditors, subject to preference
    actions?

9
  • To answer these seven questions, we must first
    examine the statutes and regulations to determine
    the prescribed duties of a broker on the
    agent/arranger versus principal/provider issue.
  • BROKER - Means a person who for compensation
    arranges or offers to arrange the transportation
    of property by an authorized motor carrier. See
    49 C.F.R. 371.1.
  • CARRIER On the other hand, is defined as a
    person providing commercial vehicle
    transportation for compensation.

10
  • Although a carrier can arrange for
    transportation of shipments, it has accepted
    responsibility to provider the regulation
    governing brokers make clear that
  • Misrepresentation Broker cant represent itself
    as carrier. (371.7)
  • Broker is defined as an arranger.

11
  • QUESTION
  • So, can a broker act like a carrier and accept
    responsibility for providing transportation as a
    carrier?
  • ANSWER
  • No, it cannot and comply with broker
    regulations.

12
VICARIOUS LIABILITY
Principal / Provider
Broker / Arranger
  • Arranges for services provided by licensed and
    authorized carrier
  • Eschews joint venture on prime/subcontractor
    claims
  • Broker not on bill of lading as carrier
  • Opens door to principal/ subcontractor claims
  • Assumption of duty in contract can be used
    against in Schramm v. Foster
  • Contractual indemnity language and purchase of
    insurance raises settlement demands
  • Contingent auto hard to find and too expensive
  • Non-delegable duty of carriers in California

13
Contemporary Horror Shows
  • Guacamole and overdue freight charges.
  • The stoplight is out, but who is the carrier?

14
Conventional Wisdom
  • Keep name of intermediary off bill of lading as
    the carrier
  • If you have asset-based operations, use brokerage
    as contracting party
  • Use different nomenclature to distinguish carrier
    and broker affiliates.

15
  • QUESTION
  • Can a broker accept primary liability for cargo
    claims?
  • ANSWER
  • Yes, but why would you want to?!

16
  • As an arranger under the statute, a broker is
    not liable for cargo claims. The Carmack
    Amendment (14706) and the bill of lading make the
    carrier in possession and control of the
    shipment. Case law is clear. Brokers are not
    liable.
  • See Chubb Group of Insurance Companies v. H.A.
    Transportation Systems, Inc., 243 F. Supp. 2d
    1064 (C.D.Cal. 2002) CGU International
    Insurance, PLC v. Keystone Lines Corp., 2004 U.S.
    Dist. LEXIS 8123

17
FREIGHT CLAIMS
Principal / Provider
Broker / Arranger
  • No primary liability under statute
  • Typically warrants to shipper that carrier is
    financially responsible for paying cargo claims
  • Gets contingent cargo insurance to cover that
    warranty
  • Assumes cargo liability by contract provision or
    broad indemnity
  • Assumes risk of loss allows offset which may
    not be recoupable
  • Purports to take possession and guarantees
    condition upon arrival

18
  • QUESTION
  • But shippers will not use brokers who dont
    accept ultimate cargo liability. What is a broker
    to do?
  • ANSWER
  • The problem of claims adjustment and cargo
    insurance loopholes drives the shipper commuting
    to insist on protection against improper claims
    adjustment by the carriers the broker selects. A
    broker by contract can insist on quick
    arbitration by the shipper and carrier, and can
    then warrant that claims for which the carrier is
    adjudged liable will be paid up to some agreed
    amount. Contingent cargo insurance can be
    purchased to cover the risk of negligent
    entrustment to carriers who are undercapitalized
    and improperly insured without accepting primary
    cargo responsibilities.

19
  • QUESTION
  • Should the intermediary offset cargo claims
    against freight charges?
  • ANSWER
  • Traditionally, he who has the gold rules in
    exempt where offset is the norm. Not so in
    regulated freight. It was precluded by Admin.
    Rules 128 and 65. Now shippers frequently insist
    on right or do it out of frustration.
    (1) Strong carrier objection
  • (a) Broker is not impartial
  • (b) Broker is only assignee by payment
  • (c) The Spiral of Death
  • (i) Insurers will not accept
  • (ii) Factors can shut carrier for breach
  • (2) If broker is arranger and not provider
  • has no basis of offset.

20
OFFSETS
Principal / Provider
Broker / Arranger
  • Cargo claims filed against carrier
  • Arbitration for economical determination
  • Broker pays if no insurance and carrier insolvent
  • Shipper offsets against intermediary
  • Constructive trust concept violated
  • Funds needed to pay non-negligent carriers is
    withheld by shipper
  • 3PLs cash flow interrupted

21
  • QUESTION
  • Should a broker accept ultimate responsibility
    for payment of freight charges?
  • ANSWER
  • There are two distinctly different views.

22
FREIGHT CHARGES
Principal / Provider
Broker / Arranger
  • Broker transmit payments upon receipt
  • If advances payment, broker becomes carriers
    assigner
  • Can guarantee payment if chooses
  • Does not guarantee rust belt shipper payments
  • Position of major 3PLS
  • Carrier extends credit to shipper or both, if
    broker guarantees payment
  • TIA view broker solely responsible for payment
    to carrier
  • Shipper protected against double payment by
    broker/carrier contract but
  • Broker accepts entire risk of shipper insolvency
  • Trumps bill of lading recourse to shipper
  • Carrier must extend credit only to broker

23
  • SO WHO SHOULD ULTIMATELY PAY FREIGHT CHARGES?
  • THE SHIPPER, THE BROKER,
  • BOTH OR NEITHER?

24
  • QUESTION
  • Is it prudent to let the shipper think you are
    transporting a shipment when you are actually
    brokering it?
  • ANSWER
  • No. It is possible to waive application of
    general principles of traditional brokerage in
    contracting but you are inviting lawsuits and
    vicarious liability issues when you become a
    provider of transportation.

25
  • QUESTION
  • Does the carrier have recourse to the shipper if
    the broker does not pay?
  • ANSWER
  • Unless expressly waived by contract or bill of
    lading agreement (e.g. Section 7), the carrier
    has recourse to the shipper in most Circuits.
  • See Southern Pacific Transportation Co. v.
    Commercial Metals Co., 456 U.S. 336, 342 (1982)
    Strachan Shipping Co. v. Dresser Industries,
    Inc., 701 F.2d 483 (5th Cir. 1983) Contship
    Container Lines, Inc. v. Howard Industries, Inc.,
    309 F.3d 910 (6th Cir. 2002) Hawkspere Shipping
    Company, Ltd. v. Intamex, S.A., 300 F.3d 225 (4th
    Cir. 2003) National Shipping Co. Of Saudi Arabia
    v. Omni Lines, 106 F.3d 1544 (11th Cir. 1997)

26
Exel Transp. Servs. v. CSX Lines L.L.C., 280 F.
Supp. 2d 617 (D. Tex. 2003)
  • The bedrock rule of carriage cases is that,
    absent malfeasance, the carrier gets paid. It is
    superficially unfair consignors must pay for
    shipments twice. However, allowing them the
    benefit of carriage without compensating the
    carrier would eventually cripple the shipping
    industry and the economy generally, as carriers
    devoted their time to investigating potential
    customers ...it is the shippers responsibility
    to choose a subcontractor that can forward money
    as well as freight ...

27
  • Fear of double payment liability has led NITL to
    insist that a broker be the agent of carriers for
    collection or that carriers waive recourse in
    writing.
  • The carriers position is that the shipper
    selected the 3PL. If the shipper will not
    guarantee the broker will transmit the payment in
    good faith, why should the carrier take the risk?

28
  • QUESTION
  • What is the effect of the TIA approach on
    intermediaries?
  • ANSWER
  • It leads to a commingling of payments
  • FIFO accounting
  • Receivables from one customer used to pay
    delinquent payables of another
  • When delinquent customer defaults, must have cash
    reserves to pay
  • Broker is only as creditworthy as its worst
    customers
  • Big 3PLs will not guarantee Ford or GM. Can a
    small broker afford to?

29
The Conduit Theory versus FIFO Accounting
  • Under the Broker/Arranger model as set forth in
    the regulations, the broker must set up special
    accounting which benefits the shipper and broker,
    and if followed, assures both that money paid to
    the broker for the carriers freight charges is
    transmitted upon receipt.
  • Under the broker regulations, it can be inferred
    that the broker should receive the payment of
    freight charges in trust and transmit payments as
    a conduit to the performing carrier to the extent
    the carrier has not already been paid.

30
The Conduit Theory versus FIFO Accounting
  • The broker regulations require separate
    accounting of brokerage services and payments due
    to carriers and provides that both shippers and
    carriers have the right to see the accounting of
    when the shipper was billed, when it paid the
    broker and when the broker paid the carrier.
  • 49 C.F.R. Sec. 371.13 Accounting
  • Each broker who engages in any other business
    shall maintain accounts so that the revenues and
    expenses relating to the brokerage portion of its
    business are segregated from its other
    activities. Expenses that are common shall be
    allocated on an equitable basis however, the
    broker must be prepared to explain the basis for
    the allocation.

31
  • Thus, under the regulations, it would seem
    improper for a broker to accept carrier cargo
    claim liability and then commingle freight charge
    receivables intended for the carrier into a
    common pot for the purpose of offset.
  • Carriers find it is like
  • robbing Peter to pay Paul.

32
  • QUESTION
  • Can a broker borrow money, pledging as
    collateral that portion of its gross receivables
    owed to carriers?
  • ANSWER
  • This significant legal question is not resolved

33
  • Experienced transportation factors will not
    purchase broker freight bills without proof that
    carrier has been paid, because upon default,
    shipper will pay carriers
  • Factors stand in shoes of brokers and acquire no
    greater collection rights than brokers.
  • Carriers can trump brokers lender when seeking
    unpaid freight charges from shippers.

34
  • Yet bankruptcy involving intermediaries have
    produced mixed results
  • WORLDPOINT (WA)
  • Intermodal (IMC)
  • Bank got to keep its collected amount, but lost
    receivables unpaid to Worldpoint at time of
    bankruptcy which were traceable to carrier
    services Coupon Clearing Case Followed
  • AIR CARGO, INC. (MD)
  • Air freight forwarder/agent for airlines
  • Borrow against gross receivables from bank
  • When filed bankruptcy, bank claimed security in
    all receivables
  • Special motor carrier committee sued airlines
    bank settled out and motor carriers acquired all
    estate rights in plan to sue airlines for double
    payments
  • JAMCO (VA)
  • Exempt broker and newspaper insert
  • Motor carrier creditors got rights to pursue
    receivables

35
  • QUESTION
  • Do motor carriers have special rights in the
    bankruptcy of intermediaries, or are they merely
    general unsecured creditors who typically take
    nothing?
  • ANSWER
  • Unless carriers waive their rights to recourse
    and agree the broker regulations and arranger
    model are trumped, carriers have important rights
    in broker bankruptcy.

36
  • Parker Motor Freight, Inc. v. Fifth Third Bank,
    116 F.3d 1137 (6th Cir. 1997)
  • (Motor carriers interest trumps the bank)
  • Yet in constructive trust not generally found in
    bankruptcy unless debtor actually segregated
  • Does this suggest that brokers, through
    malfeasance or misfeasance, can fail to segregate
    payments and thereby get to freely borrow against
    monies intended by shipper for carrier?

37
  • BLUE THUNDER (GA) may resolve this
  • Pure broker
  • Owed 42M to bank/commingled all carrier/broker
    accounts
  • Bank swept receivables
  • No broker regulations compliance/carriers have
    recourse to shippers in 11th Circuit
  • Broker violates regulations/?14704 gives any
    person private right of action

38
  • QUESTION
  • If constructive accounting is implicit in the
    regulations and would insure the shippers
    payment is forwarded to the carrier upon receipt,
    why dont all the parties agree and insist on it
    as the best way to avoid the possible double
    payment issue?

39
  • QUESTION
  • Wouldnt brokers be better protected against
    customer insolvency by the constructive
    trust/conduit principles of the arranger model
    then by accepting noncontingent payment
    obligations to the carrier under the TIA model
    contract?

40
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