The Role of the Broker- Conflicting Paradigms

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The Role of the Broker- Conflicting Paradigms Powered By Docstoc
					The Role of the Broker-
Conflicting Paradigms

  TCA 2007 Annual Convention
       March 11-14, 2007
        Bellagio Resort
      Las Vegas, Nevada
  The field of intermediaries extends from
  integrated supply chain management to
transactional brokers matching one load at
           a time on the internet.
 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?
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
                     LEGAL BASIS
     Broker / Arranger                    Principal / Provider
   Role established by common           Established by contract
    contract law and statutes of          waiving statutes and
                                          regulation under '14101(b)
    regulation; 49 CFR 371
                                         Principal enters contracts to
   Broker arranges for contracts         provide goods or services,
    between buyer and sellers             assumes liability and hires

   Professional intermediary is         Frequently “broker” is
    like an insurance agent or real       merely substituted for carrier
    estate broker                         in shipper contracts.
                 GENERAL DUTIES
     Broker / Arranger                  Principal / Provider

   Duty of good faith and due          Assumes by contract
    diligence                            carrier-like duties:
   Arranger of transportation          (1) Payment of freight
   Brings together buyers and
                                        (2) Cargo claim liability
                                        (3) Indemnity for BI & PD
   Bill of lading is contract of           “arising out of ”
    haul                                (4) Purports to take “possession
                                            of cargo”
Based on one’s answer to this
Fundamental dichotomy, all of
 the vexatious issues affecting
   intermediaries and model
contracts can be sorted out …
   Can or should an intermediary act like a carrier accepting
    responsibility for “providing” transportation?
   Can an intermediary accept primary responsibility for cargo
   Should a broker have the right to offset cargo claims against
    freight charges?
   Should a broker accept ultimate liability for payment of freight
   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?
   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
   Although a carrier can “arrange” for
    transportation of shipments, it has accepted
    responsibility to “provider” the regulation
    governing brokers make clear that:
     Misrepresentation: Broker can’t represent itself as
      carrier.” (371.7)
     Broker is defined as an “arranger.”
 So, can a broker act like a carrier and accept
 responsibility for providing transportation as
 a carrier?

 No, it cannot and comply with broker
     Broker / Arranger                    Principal / Provider
   Arranges for services provided       Opens door to principal/
    by licensed and authorized            subcontractor claims
    carrier                              “Assumption of duty” in contract
   Eschews joint venture on              can be used against in – Schramm v.
    prime/subcontractor claims            Foster
   Broker not on bill of lading as      Contractual indemnity language
    carrier                               and purchase of insurance raises
                                          settlement demands
                                         Contingent auto hard to find and
                                          too expensive
                                         Non-delegable duty of carriers in
    Contemporary Horror Shows
 Guacamole and overdue freight charges.
 The stoplight is out, but who is the carrier?
          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.
 Can a broker accept primary liability for
 cargo claims?

 Yes, but why would you want to?!
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
                 FREIGHT CLAIMS
     Broker / Arranger                  Principal / Provider

   No primary liability under         Assumes cargo liability by
    statute                             contract provision or broad
   Typically warrants to shipper       indemnity
    that carrier is financially        Assumes risk of loss – allows
    responsible for paying cargo        offset which may not be
    claims                              recoupable
   Gets contingent cargo              Purports to take possession
    insurance to cover that             and guarantees condition upon
    warranty                            arrival
 But shippers will not use brokers who don’t accept ultimate
 cargo liability. What is a broker to do?

 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
 Should the intermediary offset cargo claims against freight

 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.
     Broker / Arranger                Principal / Provider

   Cargo claims filed against       Shipper offsets against
    carrier                           intermediary
   Arbitration for economical       Constructive trust concept
    determination                     violated
   Broker pays if no insurance      Funds needed to pay non-
    and carrier insolvent             negligent carriers is withheld
                                      by shipper
                                     3PL’s cash flow interrupted
 Should a broker accept ultimate
 responsibility for payment of freight

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

 Is it prudent to let the shipper think you are
 transporting a shipment when you are actually
 brokering it?

 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
 Does the carrier have recourse to the shipper if
 the broker does not pay?

 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)
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 is [the shipper’s] responsibility
to choose a subcontractor that can forward money as
well as freight ...
   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

   The carrier’s 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?
 What is the effect of the TIA approach on

 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?
             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
    carrier’s 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.
               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.
  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.
 Can a broker borrow money, pledging as
 collateral that portion of its gross receivables
 owed to carriers?

 This significant legal question is not
   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 broker’s lender when
      seeking unpaid freight charges from shippers.
   Yet bankruptcy involving intermediaries have produced
    mixed results:
            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
 Do motor carriers have special rights in the
 bankruptcy of intermediaries, or are they
 merely general unsecured creditors who
 typically take nothing?

 Unless carriers waive their rights to recourse
 and agree the broker regulations and
 arranger model are trumped, carriers have
 important rights in broker bankruptcy.
   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?
   BLUE THUNDER (GA) may resolve this:
     Pure broker
     Owed $42M to bank/commingled all carrier/broker
     Bank swept receivables

     No broker regulations compliance/carriers have
      recourse to shippers in 11th Circuit
     Broker violates regulations/ξ14704 gives “any
      person” private right of action
 If constructive accounting is implicit in the
 regulations and would insure the shipper’s
 payment is forwarded to the carrier upon
 receipt, why don’t all the parties agree and
 insist on it as the best way to avoid the
 possible double payment issue?
 Wouldn’t 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?

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