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Where’s The Money? Indirect Liability For Freight Charges In Uncertain Economic Times

In August 2008, the troubled president of a Midwest motor carrier wrote the following letter to a trucking industry trade publication.  You can sense his pain:I have sat here and watched my accounts receivables[sic] grow and grow, but we are not putting any money in our pockets.  I also know that if this is happening to us, it is happening to everyone else. Since the Interstate Commerce Commission has gone away, shippers no longer are required to pay freight bills in seven days. In fact, most pay long after 30 days.  This delay has sprouted new ideas that are not good for trucking, like factoring and quick-pay companies that just extend the misery. . . Tough economic times are also seen in recent trends of (1) large transportation companies swallowing smaller trucking companies to leverage economies of scale; and (2) more than 935 U.S. trucking companies filing for bankruptcy in the first quarter of 2008, nearly all resulting in liquidation of their businesses.  The former trend may indicate that traditionally thin margins have become so lean that operations must get bigger to survive; and the latter may show a substantial number of trucking companies are in too deep financially to be candidates for acquisition by a larger suitor.The economic slump in the U.S. is affecting Canadian trucking companies, according to the Canadian Trucking Alliance.  “It is in the cross-border market that the Canadian trucking industry is being particularly hard hit,” according to its January 31, 2008, remarks to the House of Commons Standing Committee on Industry, Science and Technology.  From November 2006 to November 2007, overall Canadian exports to the U.S. declined by 3.8 percent, with automotive products and consumer goods leading the decline.  Rates are stagnant, excess capacity is high, thin margins are being squeezed by high fuel costs, according to the Canadian Trucking Alliance.The letter-writer’s commiseration that shippers are using motor carriers as coerced sources of short-term credit is shared by other industries.  But trucking companies, which have high fixed costs, high equipment costs, record high fuel costs, and paper-thin operating margins, likely feel more of the pain than other businesses.  Slow-pay shippers can trigger loan renegotiations and higher costs of capital to address bottlenecked cash flow; and no-pay shippers can put motor carriers quickly out of business if other no one else is found to pay languishing freight charges. A bankrupt company is the ultimate no-pay shipper.  U.S. bankruptcy laws generally forbid those companies from paying any trade creditors their pre-bankruptcy claims; those same creditors are enjoined from any attempt to collect their claims from the debtor;  and unpaid claims may sit on bankruptcy’s shelf for years, being eroded in value by inflation, only to receive a paltry distribution after liquidation of assets.Nearly every commercial bankruptcy filing involves transportation-related creditors. For example, Heartland Snacks LLC of Kansas City filed for Chapter 11 on August 7, 2008, and listed three transportation companies among its twenty largest creditors.   After carrier customers give up dreams of staying in business and shuffle off their mortally wounded fiscal coil, transportation companies often are left with unpaid accounts receivable.  Time to look elsewhere for payment. Time to find a deep pocket, make demands, and possibly file suit.  Identified below are potential targets that may be held responsible for unpaid freight charges under U.S. law.  Although an influential treatise contends that the “bedrock rule” is that the carrier always gets paid absent its own malfeasance, Sorkin, 4 Goods in Transit § 22.02[2][b] (2008), the evolution of transportation law has trended away from statutory guaranteed payment of freight charges and now relies on the law of contracts. See, e.g., 49 U.S.C. §§ 13710(A)(4) (voiding tariffs filed  with ICC); 14101(b) (motor carrier contracts may waive nearly all statutory rights and remedies, and exclusive remedy for contract breach is in  state or federal court). In other words, the prior federal statutory scheme, which seemed to guarantee common carrier profitability and provide statutory weapons to enforce freight charge collection (such as the filed rate doctrine), has been blunted by recent amendments to the Interstate Commerce Act and the widespread use of transportation contracts. See e.g., Bankruptcy Estate of United Shipping Co., Inc. v. Tucker Co., 474 N.W.2d 835, 841 (Minn. App. 1991) (contract may alter the presumption raised by the bill of lading by shifting responsibility for freight charges from the shipper). As a result, each motor carrier collection issue is greatly influenced by the parties’ contracts, including oral agreements and contracts implied by conduct, whose terms may supersede bills of lading and may waive rights and remedies otherwise afforded to the parties under the Interstate Commerce Act.  Increasingly, transportation law is becoming the law of contracts.  With that caveat, possible targets at which an unpaid carrier might take aim include: Consignees as beneficial owners of the cargo.  The carrier legitimately may demand payment of freight charges from the consignee of the freight, even if the consignee has already paid the freight amount to the shipper who ordered the transportation.  Louisville & Nashville Ry. Co. v. Central Iron & Coal Co., 265 U.S. 59, 70 (1924), held that acceptance of delivery generally establishes consignee liability for unpaid freight charges, even in the absence of  a separate contract between the carrier and the consignee and even if payment is demanded after delivery.If the consignee shows the carrier looked exclusively to another party for payment of freight charges, so as to create grounds for equitable estoppel, the consignee may not be liable to pay the charges a second time. EF Operating Corp. v. Am. Bldgs., 993 F.2d 1046, 1052 (3d Cir. 1993);  E.W. Wiley Corp. v. Menard, Inc., 523 N.W.2d 395, 405-06 (N.D. 1994).  The terms of a bill of lading often are relied upon to show estoppel and allow the consignee to escape paying freight charges to the carrier. For example, a bill of lading marked prepaid and without endorsement of the section 7 nonrecourse clause allows the consignee to escape double payment of freight charges. C.A.R. Transp. Brokerage Co. v. Darden Restaurants Inc., 213 F.3d 474, 478-79 (9th Cir. 2000).  If the cargo is shipped under a broker-carrier contract that prohibits the carrier from seeking unpaid freight charges from consignees, the carrier may again be estopped.  Id. at 476-79.Shippers that paid intermediaries, who failed to pay carriers.  The intermediary could be a freight forwarder, broker, or another carrier that fails to push the shipper’s payment down to the delivering carrier.   If the shipper had the option to pay the carrier directly, but chose to pay the intermediary instead, the shipper did so at the risk of  paying the freight charges a second time.  Hawkspere Shipping Co. Ltd v. Intamex S.A., 330 F.3d 225 (4th Cir. 2003) (maritime shipper assumes risk when it could have paid carrier, but paid cargo consolidator).  Hawkspere’s charterparty limited the carrier to collecting only from the intermediary, but the agreement was not incorporated into the bill of lading. A shipper-carrier contract that forbade the carrier from brokering the freight or otherwise assigning the loads complicates the analysis.   The shipper may legitimately argue that the unpaid carrier is estopped from seeking payment from the shipper if the shipping documents, including the transportation agreement, indicate that the unpaid carrier looked for payment solely from the intermediary.  Consolidated Freightways Corp. of Del. v. Admiral Corp., 442 F.2d 56 (7th Cir. 1971) (carrier estopped from collecting from the consignee due to “freight prepaid” notation on bill). The shipper may also argue that the intermediary, acting in breach of contract, acted as agent for the carrier in accepting the shipper’s payments. In addition, if the load was shipped freight prepaid, the shipper may escape liability because of its justified belief that the intermediary had actually paid the carrier.  Olson Distr. Sys. Inc. v. Glasurit America Inc., 850 F.2d 295, 296 (6th Cir. 1988)(carrier’s own bills and actions indicated payment expected only from freight forwarder, not shipper); Inman Freight Sys. Inc. v. Olin Corp., 807 F.2d 117, 121 (8th Cir. 1986).  On the other hand, shipper liability is the default rule in some jurisdictions notwithstanding the freight prepaid notation unless the carrier “releases” the shipper from liability. Strachan Shipping Co. v. Dresser Inds. Inc., 701 F.2d 483, 490 (5th Cir. 1983) (“The more parties that are liable, the greater the assurance for the carrier that he will be paid.”).  But see,  Jackson Rapid Delivery Serv. Inc. v. Consumer Elecs Inc., 210 F. Supp.2d 1138 (N.D. Ill 2001) (defendant shipper should not pay twice for transportation charges).The Undesignated Shipper.  Generally it’s easy to identify the shipper as the party listed on the bill of lading in the area marked “shipper”.  Sometimes the party so identified is not the actual shipper that has primary liability for paying freight charges, however.”Shipper” is not as easily defined as you might think.  New York courts scratching for the answer resorted to quoting Black’s Law Dictionary, arriving at an overly vague definition that might sweep up brokers, freight forwarders, and intermediate carriers as shippers.  Am. Home Assurance Co. v. ZIM JAMAICA, 418 F. Supp.2d 537, 538 n. 1 (S.D.N.Y. 2006) (a shipper “one who tenders goods to a carrier for transportation”).  The Northern District of Illinois consulted Webster’s Second International Dictionary to identify a shipper as “one who ships goods; broadly, one who sends goods by any form of conveyance”; but found that Webster’s Third New International Dictionary definition included shipping clerks, consignees, and receivers of goods.  Atchison T&SF Ry. Co. v. Erman-Howell, 279 F. Supp. 625, 626-27 (N.D. Ill. 1968).  An unpublished 1972 Interstate Commerce Commission ruling, rendered in the context of deciding applications for contract carrier authority, defined “shipper” as:. . .[T]he person who controls the transportation and refers to the actual shipper rather than an intermediary. Such shipper may be nominally either the consignor or consignee, but must be one or the other. The payment of the charges for transportation is evidence that the person who pays is the person who controls the transportation and such a person will be presumed to be the shipper.C-Line, Inc. v. U.S., 376 F. Supp. 1043, 1051 (D.R.I. 1974).  The ICC definition accurately stated that the shipper is the party who actually ships goods, rather than the party nominally listed as such on transportation documents, and payment of freight charges is evidence of which party controls the transportation.   See also, Thunderbird Motor Freight Lines Inc. v. Seaman Timber Co., 734 F.2d 630 (11th Cir. 1984) (actual shipper-consignee, rather than unknowing seller named as shipper on bill of lading, was exclusively liable for payment of freight charges).  The buyer-consignee-shipper in Thunderbird ordered the transportation, negotiated the charges; the activities of the seller and nominal shipper were limited to letting the carrier pick up goods sold to the consignee and helping to load. The court found the seller was acting on behalf of the consignee, who was the actual shipper.The First Circuit in EIMSKIP v. Atlantic Fish Market, Inc., 417 F.3d 72 (1st Cir. 2005), arrived at a similar result in fixing freight charge liability on the actual shipper, which claimed it had no payment obligation because it was not the named shipper on the bills of lading. In EIMSKIP, a herring broker used an order bill of lading in place of  a letter of credit in a slippery international transaction, naming the broker as the shipper. That allowed  allowing the broker to withhold delivery if the seller failed to pay for the fish on arrival in Estonia.  When EIMSKIP, the ocean carrier, was not paid for the shipping, it withheld the cargo until the fish buyer (which had booked the carrier and had previously received and paid the freight invoices) promised to pay later.  When the freight bill still went unpaid, EIMSKIP sued the buyer and the broker for the charges.  The fish buyer argued that it was neither shipper nor consignee on the bill of lading, so it had no liability for the carrier’s charges.  The appellate court, applying such motor carrier caselaw as Louisville & Nashville R.R. Co., found that the presumption created by the bill of lading as to the identity of the shipper can be overcome by the buyer’s course of conduct, including its oral agreement to pay:Conceivably, someone might be liable on a bill of lading without being named in it, either through agency doctrine or by separately agreeing to be subject to its terms. All that matters in this case is that there is nothing in general maritime law or in the precedents concerning bills of lading that makes them the exclusive means of creating liability for freight charges.

EIMSKIP, 417 F.2d at 76-77, citing, Pacific Coast Fruit Distr. Inc. v. Pa. R.R. Co., 217 F.2d 273, 273-74 (9th Cir. 1954) (bills of lading can be amended by conduct, such as shipper’s post-execution designation of party as consignee when party took over control and direction of the shipment and made successive reconsignments).Therefore, an unpaid carrier should look beyond the names on shipping documents to try to find another payor.  The carrier should check its records to determine who actually ordered the hauling, who paid for prior shipments, what promises were made to the carrier by whom, and explore the facts of the underlying sales transactions to determine whether the name of the actual shipper liable for the charges might not have appeared on the bill of lading. Customer owners, directors, and managers who paid themselves instead of carriers.  In jurisdictions that have adopted the Uniform Fraudulent Transfer Act, creditors may sue insiders of the insolvent customer if they paid themselves in preference to the customer’s creditors, including unpaid carriers.  UFTA Section 5(b) states:A transfer made by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made if the transfer was made to an insider for an antecedent debt, the debtor was insolvent at that time, and the insider had reasonable cause to believe that the debtor was insolvent.In other words, if the customer’s owner decides to pay himself back salary or severance benefits instead of paying his business’s creditors, a creditor may threaten litigation or bring suit against the insider (a broadly defined UFTA term that includes nearly anyone owning or running the business) to void the transfer and have the money paid to the creditor.  A similar remedy is available if the customer is in bankruptcy.  Section 547 of the Bankruptcy Code provides for the bankruptcy trustee to recover preferential payments received by insiders that were made within a year before the filing of the bankruptcy petition.  A key difference is that the Section 547 litigation proceeds are usually shared pro rata with all other unsecured creditors of the bankrupt business after payment of administrative expenses.Other creditors paid by the customer. As mentioned above, the U.S. Bankruptcy Code provides for recovery of payments to insiders of an insolvent debtor when the transfers were made within one year before the filing of the bankruptcy petition.  In addition, when the insolvent customer has paid non-insider creditor claims outside ordinary credit terms within 90 days before the filing of the bankruptcy petition, those transfer also may be recoverable under 11 U.S.C. § 547.  Although there are enumerated defenses in the statute, if the unpaid carrier believes that the customer has favored other creditors with payments, those transfers may be recoverable in a bankruptcy proceeding. A bankruptcy case may be commenced involuntarily under 11 U.S.C. § 303 if the unpaid carrier can convince a couple of other unpaid creditors to join in.  Unpaid carriers should consider whether to file an involuntary bankruptcy petition against the customer to make recoveries under § 547 available by creating bankruptcy court jurisdiction.A short summary of the new Chapter 15 of the U.S. Bankruptcy Code dealing with cross-border insolvencies. The purpose of this new chapter proceeding includes promoting cooperation among foreign courts, greater legal certainty for trade and investment, and aid distressed businesses to protect investments and preserve employment. 11 U.S.C. § 1501(a)(1).  Chapter 15 incorporates the Model Law on Cross-Border Insolvency. A case is commenced by a foreign representative’s filing a petition for recognition of a foreign proceeding. 11 U.S.C. § 1504. If granted, the court may provide “additional assistance” to the foreign representative if it comports with the goals of the U.S. Bankruptcy Code and protect U.S. claimants from prejudice or inconvenience in the process of their claims in foreign proceedings.  11 U.S.C. § 1507.A Chapter 15 filing is generally the only avenue for a representative of a foreign insolvency case to directly access the United States bankruptcy system and other federal courts. 11 U.S.C. §1509;  Beckering, United States Cross-Border Corporate Insolvency: The Impact of Chapter 15 on Comity and the New Legal Environment, 14 L. & Bus. Rev. Am. 281, 299 (2008). The representative can obtain an order “recognizing” one or more foreign bankruptcy proceedings so that the representative may enlist the aid of U.S. courts in the insolvency proceeding or proceedings.  The foreign representative may sue in U.S. courts and intervene in any U.S. court proceeding in which the debtor is a party. 11 U.S.C. §§ 1512, 1524. A foreign representative may commence an involuntary case under Chapter 11 or, if the foreign proceeding is a foreign main proceeding, a voluntary case under Chapter 11. 11 U.S.C. § 1511.  The representative also may commence actions under Chapter 11 that avoid acts detrimental to creditors, such as for recovery of preferential payments and fraudulent transfers. After recognition of a foreign main proceeding, certain Chapter 11 provisions apply to protect the foreign debtor and the foreign debtor’s property within the United States pursuant to Section 1520.  For example, recognition activates the Section 362 automatic stay of all collections efforts against the debtor and its property in the United States.  Chapter 11 provisions permitting a trustee to use, sell, or lease property of the estate and avoid postpetition transfers apply to the transfer of an interest of the debtor in property that is within the jurisdiction of the United States, with the foreign representative given the same rights as a bankruptcy trustee. After recognition, the court may grant additional relief, including appointing an examiner or other person to administer the U.S. assets of the foreign debtor; ordering the examination of witnesses and taking evidence concerning the debtor’s “affairs”.  11 U.S.C. § 1521(a).  The court, however, may not grant avoidance powers to the representative to recover fraudulent transfers, preferential payments, or avoid particular liens. 11 U.S.C. § 1521(a)(7).