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
(No Transcript)