Protecting Carrier Interests

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• Protecting Carrier Interests
• in Shipper and Broker Bankruptcies
• Featuring
• Henry E. Seaton, Esq. and
• John T. Husk, Esq. of Seaton Husk, LP
• FirstAdvantage Audio Conference
• June 10, 2009 / 130 p.m. CST

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• "It's only when the tide goes out that you find
  who has been swimming naked. The tide is going
  out and it won't be a pretty sight."
• -- Warren Buffett

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Troubled Industries

• Automotive GM, Chrysler
• Ripple Effect on Second Tier Suppliers
• Trend in Retailer Bankruptcies
• Sharper Image, Tweeter, Circuit City, Mattress
  Discounters, Mervyns, Steve Barrys, Bosco,
  Linens and Things, Lillian Vernon, Domain
  Furniture, Progressive Auto Parties, Goodys, KB
  Toys

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Insolvency Adversely Affects Carriers, Shippers
and Brokers
freefoto.com
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Summary

• Unsecured creditors finish last.
• Banks win because of secured position.
• As a general unsecured creditor, absent
  something else carriers and brokers can expect
  little or none of pre-petition receivables to be
  paid.

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Strategies to avoid losing receivables as mere
unsecured creditor

• Interest and attorneys fees
• Non-recourse financing LOCs
• Spreading liens
• Critical vendor
• Recourse

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LIGS 102-BItem 35Collection of Charges

• Any suit arising from the payment and/or
  collection of carriers freight charges shall be
  filed in Florida and/or the United States of
  America
• Should carrier retain an attorney to collect the
  charges accruing on the property covered by
  carriers bill of lading, the party or parties
  responsible for payment of the charges will be
  liable to carrier for attorneys fees in the
  amount of thirty percent (30) of said total
  unpaid charges or 200.00, whichever is greater
  and
• Should carrier file suit to collect the charges,
  the party or parties responsible for payment of
  such charges will also be liable to carrier for
  court costs, and interest charges at the rate of
  eighteen percent (18) per annum of the total
  unpaid charges, such interest to begin to accrue
  from the date carriers bill of lading was
  issued, however if the interest rate provided for
  herein is found to be usurious, then the maximum
  interest rate allowed under applicable usury laws
  will be the chargeable interest rate.

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Letters of Credit, Guarantees, Non-Recourse
Factoring

• Consignor execution of Section 7 is waiver of
  bill of lading guarantee.
• By credit application, carrier can seek personal
  or bank guarantee, letters of credit,
  subordination agreement.
• Consider placing future loads on C.O.D. or
  reversing credit terms when customer insolvency
  is issue.

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LiensPossessory liens trump secured creditors.

• Be sure you have something the bankrupt needs to
  reorganize and the right to hold it.

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• Truckers Statutory Lien is of Little Value
• 49 U.S.C 80110 only the freight charges on the
  loads in your possession at time of bankruptcy.
• Statutory lien does not apply to past freight
  charges
• Warehousemen, on other hand, have spreading
  lien in warehouse receipt and UCC authority to
  hold goods for payment of charges past and
  present.
• Customs brokers, 3PLs and other sophisticated
  supply chain participants negotiate priority
  liens.
• E.g. Dan River Bankruptcy - Expediters
  preferential lien extends to draymen with 154
  container loads of bed-in-a-bag at port and over
  1 million in receivables.
• State statutory liens CA, GA Mervyn.

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• Carriers and brokers can negotiate contractual
  spreading liens too
• Spreading liens can be incorporated into your
  credit applications
• Lien language can be placed in your rules
  circular with language as follows
• Item 670 - LIEN FOR FREIGHT CHARGES. Carrier
  shall have a possessory lien on shipments in its
  dominion and control for the payment of freight
  charges past and present.
• Anticipation of bankruptcy provisions can be
  placed in negotiated contracts.
• For example Upon the insolvency of any party,
  Shipper shall have the right of immediate
  delivery for all shipments in transit upon
  payment of outstanding freight charges past and
  present.

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Critical Vendor Status

• Commonly referred to as doctrine of necessity
  or necessity of payment rule See In Re
  Ionosphere Club, 98 B.R. 174, 175 (Bankr.
  S.D.N.Y. 1989)
• Debtor in Chapter 11 gets to choose who gets paid
  its pre-petition payables. See In Re Just for
  Feet, 242 B.R. 821, 825 (D.Del. 1999) In Re
  Lehigh and New England Railway Co., 657 F.2d 570,
  581 (3rd Cir. 1981)
• Affect of customer bankruptcy on poor creditor is
  not courts concern

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• If you are essential and irreplaceable on
  petition of debtor, bankruptcy court will approve
  payment to unsecured carrier provided you
  continue to serve the debtor-in-possession.
• Critical vendor petitions are usually part of
  first day motions. Dont accept traffic
  departments word for it.

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• Payment of common carrier charges and related
  fees in large Chapter 11 cases under the
  critical vendor or doctrine of necessity
  theory is a frequent occurrence.
• In Re Linens Holding Company, Case No. 08-10832
  (Bankr. D.Del. 5/2/08)
• In Re Lillian Vernon Corporation, Case No.
  08-10323 (Bankr. D.Del. 2/21/08)
• In Re Sharper Image Corp, Case No. 08-10322
  (Bankr. D. Del. 2/2008
• In Re Wickes Holding, Case No. 08-10212 (Bankr.
  D. Del. 2/5/2008) et al.

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The threat of liens motivates the grant of
critical vendor status.

• See Mervyn Holdings, Case No. 08-11586 (Bk.
  Dist. Del.) Order authorizing Debtor to pay
  pre-petition accounts owed to common carrier, p.
  8
• The Debtors anticipate common carriers may argue
  there are entitled
• to possessory liens for transportation and/or
  storage of merchandise in their
• possession and may refuse to deliver or release
  such goods before the liens
• are satisfied. Under the laws of certain states,
  carrier may have a prior lien
• on goods in its possession to secure the charges
  pursuant to Bankruptcy
• Code 363(e) such carriers would be entitled to
  protection of such a valid
• possessory lien
• The value of the merchandise in the possession of
  common carriers, as well
• as the potential harm to debtors business if the
  goods are not released or
• timely delivered and sold, far exceeds the amount
  of any pre-petition shipping
• and storage charges.
• Note Our major clients are frequently offered
  critical vendor status. (Mervyn, Goodys
  Quebecor, Heilig-Meyers, et al.)

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In Re Pilgrims Pride U.S. Bankruptcy Court, ND
TX Case No. 08-45664

• At time of filing in December 2008, owed 34.6
  million in freight charges on 810 million worth
  of product.
• Debtor filed a critical vendor motion relating to
  creditors other than motor carriers.
• Debtor filed a separate motion with the Court for
  authorization to pay pre-petition common carrier
  fees separate and apart from the critical vendor
  motion.
• Debtor acknowledged existence of motor carrier
  liens.
• Debtor concerned that given the perishable nature
  of goods and sometimes live nature of the goods,
  there was a need for action.
• Court granted separate motion and authorized
  Debtor to pay all undisputed pre-petition
  charges, Provided however, that if the value of
  the Debtors goods in the carriers possession is
  less than the amount of carriers claim, payment
  of such claim may only be made pursuant to
  Critical Vendor Motion and Order.

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Recourse Bypassing the Deadbeat and its Secured
Lender

• The bill of lading is the contract of carriage.
  Its terms and conditions bind all the parties.
  See Texas Pacific Railroad v. Leatherwood, 250 US
  470 (1919)
• Consignor primarily liable unless signed
  Section 7 or other negotiations for a release.
• Consignee becomes liable upon acceptance of
  goods.
• Truckers Express/Landstar

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Most courts follow the strict position that the
carrier has recourse to the shipper unless it
affirmatively waives the right.

• Southern Pacific Transportation Co. v. Commercial
  Metals Co., 456 U.S. 336, 342 (1982)
• Missouri Pacific Railroad Co. v. Center Plains
  Industries, Inc., 720 F.2d 818, 819 (5th Cir.
  1983)
• 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., 330 F.3d 225 (4th Cir. 2003)
• National Shipping Co. Of Saudi Arabia v. Omni
  Lines, 106 F.3d 1544 (11th Cir. 1997)
• Oak Harbor Freight Lines, Inc. v. Sears Roebuck
  Co., 513 F.3d 949 (9th Cir. 2008)

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• 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 that 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 ...

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• A broker can be the agent of the shipper,
• the agent of the carrier, or an independent
• contractor depending upon the facts.

See 49 C.F.R. 371
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RULES CIRCULAR 101Item 650THIRD PARTY BILLING

• Carrier does not employ property brokers or other
  intermediaries as its agents for the solicitation
  of shipments or the collection of freight
  charges. Carrier will invoice the shippers
  broker, bank or other agent for freight charges.
  Carrier reserves the right to bill and collect
  freight charges from the shipper on prepaid
  shipments or the consignee on collect shipments
  in the event full payment of freight charges is
  not received pursuant to third party billing.
• A shipment in which charges are to be paid by a
  party other than the consignor or consignee will
  be accepted provided recourse to the consignor is
  preserved with the carrier picking the shipment
  up at origin. The consignor and consignee
  guarantee to pay the charges if the third party
  fails to do so in the time allotted under the
  applicable credit regulations. Any such shipment
  will not be accepted if the consignor executes a
  nonrecourse provision of the bill of lading.

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Practical Settlement Issues When Broker Fails to
Transmit Funds

• Shippers feel victimized by double payment
  demands.
• Shipper will voluntarily withhold payment if
  convinced broker is engaged in malfeasance or
  misfeasance.
• Carrier should offer shipper indemnity against
  demand by broker for payment made by offset.
• Splitting the difference and workouts make
  business sense (e.g. Enron, Lighthouse, Partners).

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Effect of Stay on Recourse

• Filing of bankruptcy stays suits against the
  bankrupt estate.
• Bankruptcy stay does not effect third party
  recourse.
• See Old Dominion Freight Lines, Inc. v.
  Amazon.com, Inc., U.S. Dist. Ct., E.D.Va., Case
  No. 02-1006-A (2002).
• Third party lawsuit against shipper may be
  referred to bankruptcy court, though, as related
  proceeding.

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Preference Actions Feeding on the Victims
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11 U.S.C. 547(b)

• Permits the Trustee or the Debtor-in-Possession
  to recover payments made to the unsecured
  creditors within 90 days of the filing of its
  petition.
• The intent of this statute is
• to preclude an insolvent debtor from favoring
  particular creditors and scaring off trade
  accounts from doing business with it when
  bankruptcy seems inevitable. See Luper v.
  Columbus Gas, 91 F.3d 811, 815 (6th Cir. 1996)

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What the Trustees must prove

• (1) that payment was made to creditor
• (2) on account of an antecedent debtor
• (3) while the debtor was insolvent
• (4) payment made within the 90 day preference
  period prior to filing
• (5) the creditor got more than it would have in
• liquidation

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Why the Preference Statute is not Fair

• Because little if any of the money collected from
  unsecured creditors is ultimately redistributed
  to members of the class.
• Because the trustees indiscriminately sue every
  unsecured creditor in sight.
• Because the law is applied to require unsecured
  creditors who are slow paid to give back payments
  made outside the ordinary course because the
  creditor could not motivate more timely payment.
• In practice, trustees demand return of all
  payments made within 90 days and shift the burden
  to the transportation creditor.
• IN OTHER WORDS, IF YOU DONT COLLECT FREIGHT
  CHARGES ON TIME, YOU MAY NOT GET TO KEEP WHAT YOU
  DO COLLECT!

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• (1) The amount of preference payments reclaimed
  by trustees under the statute are huge.
• (2) Often the creditor doesnt find out about the
  preference claims until 2 years after the
  bankruptcy is filed
• (3) The bankruptcy court has jurisdiction
  and venue. You can be served by mail and forced
  to come to Delaware on short notice.

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The primary defenses to preference actions are
ordinary course of business and new value 11
U.S.C. 547(c)
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Ordinary Course of Business Defense to Preference
Actions

• Ordinary course defense does not mean only the
  creditor who got special preferential treatment
  must return payments for redistribution!!!
• Most creditors were slow walked by the deadbeat
  in the 90 day period and slow pays like fast pays
  are often considered outside the ordinary course
  of business defense.

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To prove ordinary course of business defense,
creditor must show

• The debt was incurred in debtors ordinary course
  of business and
• The payment was made in ordinary course of
  affairs between debtor and transferee

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Because freight charges are usual and ordinary
expenses incurred by most bankrupts, the first
prong is not an issue, but to prove that the
payment was made in ordinary course of affairs
between the debtor and the transferee, you must
show that the payment was neither inordinately
late or early. In re Fred Hawes Org.,957 F.
2d 244 (6th Cir. 1992)
33
A variation in contractual terms is not fatal,
but it will be used against the creditor unless
you show a long history before the preference
period of accepting similar tardiness. Fiber
Lite Corp. v. Molded Acoustical Prods., 160
Bankr. 608, affd 18 F.3d 217, 223(3rd Cir. 1994)
34
Days-to-Pay analysis showing course of dealing
before and during preference period is the most
effective evidence providing ordinary course
defenseSet up and manage Days to Pay data to
prevent slow pays and defeat preference
demands.The role of interest and attorneys
fees.
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The Role of Bank Wires and ACH in Avoiding
Preference and Effect of Bankruptcy
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Do not ignore preference demand letter. Respond
with analysis with letter of counsel and assure
trustee of a fight.Do not be low hanging
fruit - consolidate defense costs with other
victims to overcome home court advantage(e.g.
Delaware Counsel Pacer)
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New Value Defense to Preference Actions

• A trustee may not avoid monies paid to a carrier
  during the preference period to the extent that
  after the alleged payment, the motor carrier gave
  new value. 11 U.S.C. 547(c)

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Under the new value analysis you

• Look at the data you received payment for the
  alleged preference.
• Look at your unpaid invoices arising after
  receipt of the alleged preference and reduce the
  preference obligation, not otherwise avoidable,
  dollar for dollar starting with the oldest
  subsequent invoice first until the preference
  claim or available new value is extinguished.

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Caveat

• Giving up new value to extinguish a
  preference reduces your claim, but as a claim the
  amount owed an otherwise unsecured creditor is
  worth little if anything.

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When the Bankrupt is the Intermediary
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• The inadequately resolved issue is whether the
  freight charges paid to a broker represent assets
  of the brokers estate to the extent that the
  payment represents freight charges due to the
  carrier.

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• If the broker functions as an agent working on
  an undisclosed commission like a realtor or an
  insurance agent, then arguably it owes the
  shipper and the carrier a constructive trust duty
  to transmit payments and should not be pleading
  or hypothecating its gross receipts to a second
  creditor.

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The broker regulations support this view of the
broker as a constructive trustee of funds

• Broker must segregate accounts
• Broker must account on shipment-by-shipment basis
  for payments received from shippers and payments
  to carriers. 49 C.F.R. 371.3(a)(4)(5)

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Broker Insolvency The Conduit TheoryTracing
and Special Motor Carrier Creditors Committee
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• The Conduit Theory or Interline Trust Theory
  holds that a brokers receivables and the
  payments it receives are not assets of its
  bankrupt estate to the extent such payments or
  receivables represent unpaid freight charges due
  to the motor carrier.
• In Parker Motor Freight, Inc. v. Fifth Third
  Bank, 116 F.3d 1137 (6th Cir. 1997) the Court
  recognized the interline trust theory to hold
  that the rights of the motor carrier trump the
  rights of the secured creditor with respect to
  such receivables.

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• The conduit theory is consistent with the broker
  regulations requiring the broker to segregate
  funds and to keep load-by-load accounting of
  freight charges received, commissions earned and
  carrier payments made.
• While brokers typically do not maintain escrow
  accounts, the conduit argument suggests that they
  should and that brokers should not pledge or
  hypothecate receivables to be collected for the
  benefit of carrier to secure unrelated loans.
• Although transportation factors are aware from
  experience that the carriers recourse rights to
  collect from the shipper can defeat their
  security interests in broker receivables, large
  lending institutions typically take an arrogant
  and uninformed position, claiming in bankruptcy
  their perfected security interest trumps the
  carriers collection rights.

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• Increasingly motor carriers are combining efforts
  in intermediary bankruptcies to assert their
  special interests under the conduit theory to
• To oppose the estate and the secured creditor,
  collecting through recourse their unpaid freight
  charges from the shippers
• To challenge the secured creditors right to cash
  collateral to the extent the broker has failed to
  segregate and pay carrier bills
• To argue that the secured creditor and the broker
  have engaged in equitable subordination by
  applying collected motor carrier receivables to
  pay brokers debt (the sweep account problem)
• To defeat the estates inevitable preference
  action, arguing that the monies paid to the
  carrier were not recoverable assets of the estate
  but monies transmitted to the carriers in trust.

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How these cases have played out thus far can best
be shown in the following examples

• In Re Worldpoint Logistics, Inc., Case No.
  02-23448, U.S. Bankruptcy Court, Western District
  of Washington (At Seattle)
• Computrex
• Transportation Revenue Management d/b/a TRM,
  Assignee of Mastertrans, Inc., et al. v. Freight
  Peddlers, Inc. et al., 2001 Fed. Carr. Cases
  84,181
• In Re Air Cargo, Inc., Case No. 04-37512, U.S.
  Bankruptcy Court, District of Maryland
  (Baltimore)
• In Re Blue Thunder Auto Transport, Inc., Case
  No. 07-61268, U.S. Bankruptcy Court, Northern
  District of Georgia (Atlanta)
• Pending Case In Re Gary W. Schulte, Case No.
  08-36130, U.S. Bankruptcy Court, Southern
  District of Texas. Schulte is the owner of serial
  brokerages personally liable for fraud and
  embezzlement.
• Pending Case In Re Gulf Coast Transport, Inc.,
  Case No. 09-31896, In the U.S. Bankruptcy Court,
  Northern District of Texas. Can a broker factor
  its receivables and direct funds through its
  carrier affiliate?

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For more information please visitSeaton
Husk, LPwww.transportationlaw.netandTransport
ation Revenue Management, Inc.www.trmcollect.net
Please direct any questions or comments to
info_at_transportationlaw.netThank you!