10/5/2015. Introduction. Transportation Lawyers Association Transportation Law Institute

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1 Double Trouble: Collecting in Tricky Broker Bankruptcy Scenarios Transportation Lawyers Association Transportation Law Institute Jeffrey Cohen C. Fredric Marcinak Rick A. Steinberg Introduction Shippers, Consignors, Forwarders, Customs Brokers, Brokers, 3PLs, 4PLs, Interline Carriers, Warehousemen, Consignees 1

2 Introduction The Parties to a Shipment Basic Rights/Duties Development of Trust Theories Recent Broker Bankruptcy Cases So, the broker filed for Bankruptcy, what do I do now? Carriers May Pursue Shippers or Consignees Directly for Freight Charges Even if the freight charges sought by the motor carrier have already been paid to a freight broker, in many circumstances, the shipper or consignee remains responsible for payment of the freight charges earned by the motor carrier. This is the case even though this may result in duplicate payment of these charges. Courts have determined that a shipper bears the risk when it chooses to pay for Freight Charges through a broker rather than directly to the carrier. Oak Harbor Freight Lines, Inc. v. Sears Roebuck & Co., 513 F.3d 949 (9th Cir. 2008). Shippers remain bound to pay the carrier directly for services rendered per the bill of lading. Carriers May Pursue Shippers or Consignees Directly for Freight Charges Motor carriers maintain an independent right to collect from shippers under the bill of lading. In a case involving a claim by a motor carrier directly against a shipper/customer of a bankrupt freight broker, the Court determined that the stay does not implicate such third party claims. Old Dominion Freight Lines, Inc. v. Amazon.com, Inc., CIV.A A, 2002 WL (E.D. Va. Oct. 24, 2002) (bracketing added) 2

3 Shipper Liability A bill of lading is the basic transportation contract between the consignor and the carrier, and its terms bind the consignor and the carrier. Southern Pacific Transp. Co. v. Commercial Metals Co., 456 U.S. 336, 342 (1982). A consignor is the person named in a bill of lading as the person from whom the goods have been received for shipment. 49 U.S.C.A As a general rule, the bill of lading s shipper-consignor is primarily liable for all freight charges associated with the shipment of cargo including freight charges. Shipper Liability Thus, a carrier has not only the right but also the duty to recover its proper charges from the shipper for services performed. Id. at ; accord Hawkspere Shipping Co. v. Intamex, 330 F.3d 225, 237 (4 th Cir. 2003) ("the bill of lading is a contract between the shipper and the carrier and the carrier has a contractual right to expect payment pursuant to that bill ) (quoting Nat'l Shipping Co. of Saudi Arabia v. Omni Lines, 106 F.3d 1544, (11th Cir. 1997)). Consignee Liability A consignee is defined as the person named in a bill of lading as the person to whom the goods are to be delivered. 49 U.S.C.A A carrier may recover outstanding freight charges from a consignor, consignee, or owner of the property, or on others by statute, contract, or prevailing custom. CSX Transp. Co. v. Novolog Bucks County, 502 F.3d 247, 255 (3d Cir. 2007) The consignee becomes a party to the transportation contract, and is therefore bound by it, upon accepting the freight; thus it is subject to liability for transportation charges even in the absence of a separate contractual agreement or relevant statutory provision. Id. 3

4 Trust vs Debt The crucial factor in distinguishing between a trust relationship and an ordinary debt is whether the recipient of the funds is entitled to use such funds as its own, and to commingle the funds with its own. 5 Generally, commingling indicates a debtorcreditor relationship and not a trust. 6 If the intention of the parties was that the money be kept or used as a separate fund for the benefit of the payor or a third person, a trust is created. If their intention is that the person receiving the money have the unrestricted use thereof, a debt is created Summ. Pa. Jur. 2d Probate, Estates, and Trusts 29:13 (2d ed.) Constructive Trust A constructive trust arises by operation of law where a person holding title to property is subject to an equitable duty to convey it to another on the ground that he would be unjustly enriched if he were permitted to retain it. Missouri, 702 F. Supp. at 633 (W.D. Mich. 1988). 11 U.S.C. 541(d) City of Farrell v. Sharon Steel Corp., 41 F.3d 92, 95 (3d Cir. 1994) ( We start from the well-settled principle that debtors do not own an equitable interest in property they hold in trust for another, and that therefore funds held in trust are not property of the estate ) (alterations and quotations omitted). 4

5 11 U.S.C.A. 541 d) Property in which the debtor holds, as of the commencement of the case, only legal title and not an equitable interest, such as a mortgage secured by real property, or an interest in such a mortgage, sold by the debtor but as to which the debtor retains legal title to service or supervise the servicing of such mortgage or interest, becomes property of the estate under subsection (a)(1) or (2) of this section only to the extent of the debtor's legal title to such property, but not to the extent of any equitable interest in such property that the debtor does not hold. 11 U.S.C.A. 541 Interline Trust History In the Matter of Penn Central Transportation Company, 486 F.2d 519 (3d Cir. 1973) provides that federal common law imposes a trust when an entity acts as a conduit, collecting money from one source and forwarding it to its intended recipient. Railroad s bankruptcy trustee sought order directing initiating railroad carrier to pay interline freight charges owed to the railroad in bankruptcy reorganization proceedings. Third Circuit Court of Appeals held that, despite the commingling of monies by the collecting railroad, and in view of the absence of any payment of interest on freight charges and other collected monies during the time they were held by the collecting railroad, such freight charges were held by the railroad in in trust for the interline railroads and were not the property of the estate but were held in trust for payment to the other railroads. Interline Trust in the Trucking/ Freight Brokerage Environment Parker Motor Freight, Inc. v. Fifth Third Bank, 116 F.3d 1137 (6th Cir. 1997) Sixth Circuit Court of Appeals held that common law trust principles embraced in interline trust doctrine apply equally to joint network of rail and motor carriers; and, freight charges collected by one motor carrier on behalf of another for services the latter performed are held in trust for the latter carrier, however, material issues of fact precluded summary judgment for either bank or carrier. 5

6 Commingling In re Computrex, Inc., 403 F.3d 8-7 (6th Cir. 2005) A broker does not gain an ownership interest in the property it collects for carriers by commingling the monies with other funds that are part of the bankruptcy estate. Id. at 632 ( the commingling of funds by the collecting carrier did not defeat the finding of a trust, because the commingling was to have been temporary under the established accountsettling practice ). Collection Rights In Re: Worldpoint Logistics (Case No , W.D. Wash. 2001), the carriers (among others) successfully argued that the carriers collection rights trumped the rights of Deutsche Bank, the secured lender standing in the shoes of the debtor-in-possession. Interline Trust In re Columbia Gas Sys., Inc., 997 F.2d 1039, 1059 (3d Cir. 1993), cert. denied, 510 U.S (1994) the Third Circuit Court of Appeals recognized that federal common law interline payment trust concept was not restricted to railroads, but was applicable to any entity [that] acts as a conduit, collecting money for one source and forwarding it to its intended recipient, in this instance, an interstate pipeline. 6

7 Transportation Revenue Management d/b/a TRM v. Freight Peddlers, Inc. C.A.2: , 2000 WL (D.S.C. Sept. 7, 2000) Transportation Revenue Management (TRM), a motor carrier factor and assignee of five motor carriers, sued Freight Peddlers, Inc., a federally licensed transportation broker, its owner and sole shareholder and the broker s bank, for monies paid to Freight Peddlers by shippers for transportation service provided by the motor carriers. TRM s principal claim was that the freight charges were held in constructive trust by Freight Peddlers and its owner for the benefit of the motor carriers. Transportation Revenue Management d/b/a TRM v. Freight Peddlers, Inc. C.A.2: , 2000 WL (D.S.C. Sept. 7, 2000) The broker s owner and the broker s bank denied the freight charges were subject to any type of trust. TRM pointed out federal broker regulations, including 49 C.F.R and , imposed duties upon brokers regarding monies collected for freight charges. The court reviewed the trust and conduit theories of In re Columbia Gas Systems and In re Penn Central, supra, and further noted federal regulations 49 U.S.C (a)(4) and (6) clearly contemplate a broker such as Freight Peddlers may act as a conduit by collecting freight charges owed to the motor carriers, making appropriate payment to the carrier, less any brokerage charges. Transportation Revenue Management d/b/a TRM v. Freight Peddlers, Inc. C.A.2: , 2000 WL (D.S.C. Sept. 7, 2000) In the absence of an expressly-created trust, we look to the language of the parties, their conduct, and other circumstances surrounding the transaction probative of their intent. Id. at 1059 (citing In re Penn Central Transp. Co., 486 F.2d at ). In this case, the respective contracts between Freight Peddlers and the motor carriers provide that Freight Peddlers will perform all billing and collecting services from the party to whom the motor carrier delivers goods, and that Freight Peddlers will pay the carrier upon receipt of the bill of lading, clear of exceptions, along with an invoice. 7

8 Transportation Revenue Management d/b/a TRM v. Freight Peddlers, Inc. C.A.2: , 2000 WL (D.S.C. Sept. 7, 2000) In accordance with such practices, the federal regulations at 49 U.S.C (a)(4) and (6) clearly contemplate that brokers such as Freight Peddlers may act as a conduit by collecting freight charges owed to the motor carrier, and making appropriate payment to the carrier, less any brokerage charges. 49 C.F.R C.F.R Records to be kept by brokers. (a) A broker shall keep a record of each transaction. For purposes of this section, brokers may keep master lists of consignors and the address and registration number of the carrier, rather than repeating this information for each transaction. The record shall show: (1) The name and address of the consignor; (2) The name, address, and registration number of the originating motor carrier; (3) The bill of lading or freight bill number; (4) The amount of compensation received by the broker for the brokerage service performed and the name of the payer; (5) A description of any non-brokerage service performed in connection with each shipment or other activity, the amount of compensation received for the service, and the name of the payer; and (6) The amount of any freight charges collected by the broker and the date of payment to the carrier. (b) Brokers shall keep the records required by this section for a period of three years. 49 C.F.R The federal law is clear as to Debtor s duties and obligations as a property broker. When a property broker receives funds from a shipper or consignee, it is required by law to transmit payment to the underlying carriers. See 49 C.F.R

9 49 C.F.R 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 Recent Cases Eleets Transportation Company, Inc. United States Bankruptcy Court Middle District of Florida Case No. 3:12-bk-8151-JAF Involuntary Chapter 7 bankruptcy case filed December 28, 2012 Order for relief entered January 25, 2013 Trustee appointed February 4,

10 Eleets Eleets provided brokerage services, which included contracting separately with freight shippers to provide for the shipment of goods, and to independently contract with various third party truck, air and rail carriers, independent contractors and owner-operators to deliver the products. Eleets would invoice and bill the shippers and collect accounts receivable. Order Authorizing Deposit of Receivables into the Estates, and Releasing and Discharging Debtors Paying Customers dated April 12, 2013 (the Payment Procedures Order ). Key provisions of the Payment Procedures Order: Clearly, each Debtor s interests in their respective Receivables constitute property of their respective Estates. Disputes exist, however, with respect to whether a portion of the Receivables relating to unpaid freight charges are subject to claims of the truck, air and rail capacity providers (each a Carrier and collectively, the Carriers ) who provided transportation services on behalf of the Debtors respective customers/shippers (each a Shipper and collectively, the Shippers ). Eleets (cont.) Every Shipper that has an outstanding account payable with Eleets or ELI (the Receivables) is hereby directed to pay such amounts owed to the Trustee or his designee. Upon the Trustee s receipt of payment the respective Shipper, person, entity, consignee or customer is discharged of any liability to any other party with respect to the Eleets and ELI invoices that are the basis for such payments and for any and all services reflected in such invoices, to the extent of such payment. The rights, if any, of Carriers claiming entitlement to payment, either from Eleets, ELI, or from the applicable Shipper, shall attach to the portion of Receivables in the Trustee s account that this Court later adjudicates to be due and owing to such Carriers in the same order and priority and to the same extent that existed before the Petition Date. Order Granting Trustee s Motion to Approve Settlement Agreement between the Trustee and Wells Fargo Bank, N.A. and the Request for Entry of Bar Order Enjoining Carriers from Asserting Direct Claims against the Debtors Accounts Receivable dated April 25, 2014 (the Bar Order ). Eleets (cont.) Key provisions of the Bar Order: Wells Fargo asserts that its Pre-Petition Liens represent first priority security interests in all of the Receivables, including the Proceeds thereof. However, some of the Carriers initially asserted special rights and claims with respect to the Receivables. These Carriers essentially argued two theories. First, some asserted that the portion of any Receivable representing the transportation charge of the Carrier for moving a shipment was being held in a constructive trust by the Shipper for the benefit of the Carrier if such charges were not paid to the Carriers by the relevant Debtor that arranged for the transportation. Second, some of the Carriers asserted that they have an independent contract right to pursue Shippers for that portion of the Receivables representing the transportation charges for shipments transported by the Carriers for the Shippers where such Shippers executed Bills of Lading. 10

11 Eleets (cont.) Based on the foregoing circumstances, Shippers owing money to the Debtors based on the Receivables have raised a concern for the risk of dual payment exposure. If a Shipper pays a portion of a Receivable to a Carrier, the Shipper (and the Carrier receiving the payment) could be pursued by the Trustee and Wells Fargo and, conversely, if a Shipper pays the Trustee, it may be pursued by the relevant Carrier for payment. Some Shippers are therefore refusing to pay the Receivables to the Trustee. Trustee filed adversary proceedings against shippers who did not pay freight charges for turnover of property of the bankruptcy estate pursuant to 11 U.S.C. 542 and for account stated. Trustee also sued carriers who provided shipping services to Eleets for turnover and account stated. Recent Cases New Century Transportation, Inc. United States Bankruptcy Court District of New Jersey Case No (MBK) Voluntary Chapter 7 bankruptcy case filed June 11, 2014 New Century New Century operated a substantial trucking business moving freight for customers throughout the United States. Order Establishing Procedures for Collection of Accounts Receivable, Payment to Third-Party Carriers, and Release, and Discharge of Customers; Fixing Last Date for Carriers to File Proof of Claim and Approving Form of Notice and Proof of Claim dated October 15, 2014 (the Procedures Order ). Key provisions of the Procedures Order: Carriers, their agents and assigns are hereby precluded, barred, and permanently enjoined from seeking, demanding or taking any other action as against a Customer or Capital One and Prospect Capital where the purpose of such action is to obtain payment of amounts owed to the Carrier by any of the Debtors, including the commencement or continuation of any actions or proceedings commenced by a Carrier in any court or forum. [Carrier] filed adversary complaint to determine interest in property and for related relief. Pursuant to 28 U.S.C. 157(b)(2)(K), an adversary proceeding complaint to determine extent, validity and priority of liens and interests in property is a core proceeding brought in bankruptcy court in the context of the main bankruptcy case. Allegations of [the Carrier s] adversary proceeding: [Carrier] is a motor freight carrier. [Carrier] was a party with New Century to an Interline Agreement. Under the Interline Agreement, [Carrier] and New Century agreed to the interline cartage and handling of motor freight for customers. Specifically, pursuant to the Interline Agreement, either party could originate the shipment of goods for hauling a certain distance and then transfer the goods to the other party for hauling to the customer s final destination. After delivery of the goods, the parties would settle the interline monies on a weekly basis. New Century s customers would make payment to New Century for the total cost of transporting the goods, while [Carrier s] customers would make payment to [Carrier]. After the collecting carrier received payment from customers that received the interline services, the collecting carrier was required to pay the receiving carrier the apportioned amount due to the receiving carrier pursuant to the Interline Agreement. New Century would not pay [Carrier] any money if the customer did not pay New Century for the cost of transporting the goods. [Carrier] averred that New Century collected money from New Century s customers on account of [Carrier] providing interline services pursuant to the Interline Agreement. Pursuant to the Interline Agreement and applicable law, [Carrier] has a first and best beneficial right, title and interest in and to the Interline Trust Fund, both legal and equitable. New Century is required to turn over to [Carrier] the Interline Trust Fund. New Century is required to hold the monies it collected pursuant to the Interline Agreement comprising the Interline Trust Fund in trust for the benefit of [Carrier]. New Century failed to pay over to [Carrier] the amount of the Interline Trust Fund. The Interline Trust Fund is not property of the Debtors estates pursuant to section 541(a) of the Bankruptcy Code. Demand was made by [Carrier] to New Century to turn over the Interline Trust Fund, but New Century has refused and failed to turn over the Interline Trust Fund to [Carrier]. 11

12 Recent Cases Leading Edge Logistics LLC United States Bankruptcy Court District of Delaware Case No (MFW) Voluntary Chapter 7 case filed May 19, 2014 Leading Edge Logistics LEL was a privately held global logistics management company that provided truckload transportation, specialized heavy haul transportation, freight forwarding, international shipping, intermodal, air/ocean, contract carriage and warehousing (the Logistics Services ). Motion of Alfred T. Giuliano, Chapter 7 Trustee, for Order Pursuant to Bankruptcy Code Section 105(a) and Bankruptcy Rule 2002 Authorizing and Approving Procedures for the Collection of Accounts Receivable filed June 9, Motion was dismissed voluntarily August 29, Key provisions of the Motion: The Debtors would provide the Logistics Services to manufacturers and related entities (the Customers for the delivery of their goods. To complete delivery of the Customers goods, the Debtors entered into agreements with certain motor or other transportation carriers (collectively, the Carriers ) for the delivery of the Customers goods. The Debtors would then invoice the Customers for the Logistics Services, thereby creating accounts receivable (the Accounts Receivable ) due from the Customer to the Debtors. The Customers generally would pay the Debtors directly, and the Debtors would deposit the funds in their operating account. The Carriers would invoice the Debtors for the Carriers services, and the Debtors would generally pay the Carriers independent of the Accounts Receivable. On the other hand, certain Carriers have asserted that under the operative agreements or under applicable law the Customers are obligated to pay them (i.e., the Carriers) directly, regardless of whether the Customers have or have not paid the Debtors for the applicable amount of the Accounts Receivable. Order Dismissing without Prejudice Motion of Alfred T. Giuliano, Chapter 7 Trustee, for Order Pursuant to Bankruptcy Code Section 105(a) and Bankruptcy Rule 2002 Authorizing and Approving Procedures for the Collection of Accounts Receivable Clarity in the Law? 12

13 Lessons Learned So, the broker has filed for bankruptcy, what do I do now 13