Transcript Slide 1

MAP-21
(Fighting Fraud in Transportation)
What the New Bond Regulations
Require and How It Affects Carriers,
Brokers And Forwarders
Henry E. Seaton, Esq.
Seaton & Husk, LP
[email protected]
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FFIT Legislation / Issues
A.
B.
C.
D.
Why was FFIT passed?
What does FFIT require?
What is FFIT’s current regulatory status?
What effect does the FFIT legislation have on the
industry?
E. Does FFIT eliminate the freight charge payment
problem involving intermediaries?
F. What should be brokers’, forwarders’ and carriers’
contractual responses to deal with FFIT?
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A. Why was FFIT passed?
• The stated purpose of FFIT was to “ensure that brokers’ and
forwarders’ freight charge obligations to shippers and brokers
were met.”
• The bill was passed as a compromise involving three powerful
trade associations – OOIDA, TIA and ATA – to address the
problem of carriers which were not being paid freight charges
on transactional shipments which were “double brokered.”
• “Double brokerage” for purposes of this presentation, is the
practice of an intermediary accepting a shipment from a
shipper or its broker as a carrier, and without notice to its
customer, while then acting as a broker, tenders the shipment
to a subcontracted carrier which it does not pay.
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B. What does FFIT require?
• FFIT requires every broker or freight forwarder
involved in regulated transportation to have a $75,000
bond or bank trust agreement to act as surety for its
contractual obligations to pay freight charges to the
retained carrier.
• FFIT outlaws the past practice of “convenience
interlining” unless the carrier has distinct broker or
forwarder authority (in its own name or in an
affiliate) and conducts operations under the authority
in which the bond or bank trust is issued.
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• FFIT provides a $10,000 fine for arranging
transportation without a license and bond.
• Officers and directors as well as an unlicensed
intermediary have unlimited and unspecified
liability to persons injured by the failure of an
intermediary to comply with the statute who
are afforded a federal court remedy.
• Presumably the remedy would be for failure to
pay freight charges although the statute is not
specific.
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C. What is FFIT’s current
regulatory status?
• After much confusion, the bonding requirements
went into effect on December 1, 2013.
• The agency has reportedly canceled approximately
9,000 existing bonds and freight forwarder licenses
for noncompliance.
• After much concern over pricing, the cost of a surety
bond for a creditworthy intermediary is currently
$1700 or less.
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• A surety or trustee may cancel a bond on 30
days notice.
• The agency will suspend a broker’s or
forwarder’s license if notified that the $75,000
amount has been reduced by an unreplenished
payment.
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• Persons authorized to issue bonds and trust
agreements include:
– Sureties which appear on the US Department of
Treasury list of approved sureties. See
http://www.fms.treas.gov/c570/c570_a-z.html.
– Banks or finance companies:
• approved by the agency under 49 C.F.R. 387.307(c)
• Which maintain corpuses composed of:
– $75,000 in readily available assets;
– Not contingent on personal guarantee or pledged receivables.
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• Rules governing the handling of bond claims
include:
– Surety or Trustor must:
• Respond in 30 days
• Pay claim if:
– Subject to its review, the principal does not contest claim
– The principal does not respond and the claim is deemed valid
– If contested and not resolved, surety must pay if
reduced to judgment.
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• If principal becomes insolvent:
–
–
–
–
The surety must cancel the bond on 30 days notice.
The agency will suspend the principal’s authority.
The surety must advertise for 60 days.
The surety may then pro rate within 30 days
thereafter.
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• Left to be implemented by the FMCSA are rules
including:
– Promulgation of a new application for brokers and
forwarders:
• Showing that an officer and director has three years of
experience; and
• That applicant is fit.
– Provisions for renewal of the license every 5 years.
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– Implementing regulations to clarify lacuna not
specified in the statute.
– Rules for how to advertise.
– Interpleader.
– Surety and Trustor are responsible for their own
costs.
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• By order issued in August of 2013, the agency opined
that the statute to the extent implemented to date was
self-executing and apparently believes it has until 4
years after the 2012 enactment of MAP-21 to
promulgate other implementing regulations.
• Agency will consider licensing and testing
requirements as part of its URS modifications.
• Listening session held in Nashville on January 13.
Additional listening sessions at Mid American Truck
Show scheduled for March 28 in Louisville and
CVSA Spring Conference April 9 in Los Angeles.
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• In addition to 3 years of experience, some test
of proficiency can be expected for new
entrants.
– TIA proposes that new applicants be required to
take an educational course provided by a nonprofit organization (between 30 and 90 hours of
online or in-person work).
– Faculty must be from an accredited school or
university.
– Applicant must pass the test in order to receive a
certificate.
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D. What effect does FFIT have on industry?
• Pending in the U.S. Court of Appeals for the D.C.
Circuit and in a pending petition for waiver with the
agency are efforts by the Association of Independent
Property Brokers & Agents (AIPBA) to overturn or
waive the bonding requirements.
• 35 state trucking associations, 3 divisions of ATA and
several independent trade organizations have
expressed concern over FFIT’s affect on the
outsourcing of freight by small carriers and have
sought legislative amendment.
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Discussion of the requirements of FFIT
and its affect on carriers.
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E. Does FFIT eliminate freight charge
payment issues with intermediaries?
• The availability of $75,000 will ameliorate the hardship on the
industry when through malfeasance or misfeasance, an
intermediary fails to pay its carrier. The bond alone will not
eliminate the problem of malfeasance and misfeasance or end
the “double payment” problem.
• The bond is capped at $75,000 and does not establish a sliding
scale for recovery in larger bankruptcies (Worldpoint, Enron,
ACI, Blue Thunder, Eleets).
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• The systemic issue of who is responsible
for paying the freight charges:
–
–
–
–
The broker or forwarder;
The shipper;
The consignor;
The consignee.
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• Under existing law in most jurisdictions, the broker or
forwarder is a conduit for freight charges and the carrier has
recourse to the shipper upon the intermediary’s default.
• See 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); Exel
Transp. Servs. v. CSX Lines L.L.C., 280 F. Supp. 2d 617 (D.
Tex. 2003); Oak Harbor Freight Lines, Inc. v. Sears Roebuck
& Co., 2008 U.S. App. LEXIS 1046 (9th Cir. 2008)
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• FFIT does not change this, and carriers will
still be entitled to seek recourse when the
bond is insufficient (the threshold for
nonpayment is just higher).
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F. What should be brokers’, forwarders’ and
carriers’ best practices in light of FFIT?
• FFIT is the tipping point for motor carriers to set up
affiliated property brokers or freight forwarders
because it:
– Precludes carriers from directly arranging for truckload
transportation to be provided by others.
– Criminalizes past lawful convenience interlining in the
name of fighting fraud.
– As a result of FFIT, carriers must ensure that truckload
shipments using retained outside carriers are clearly
identified as brokered or forwarded shipments.
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Implementation Issues
Presented by FFIT
• Question: Is it better to split operations of
intermediaries into corporations separate from
motor carrier services?
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• Answer: The statute says only that the carrier
must have separate operating authority and
does not require separate corporations, yet
separating operations into different corporate
entities is strongly advised.
– Confusion can only result from one corporation
wearing two hats.
– Carriers are required to issue delivery receipts,
brokers are not.
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– Carriers accept safety duties and freight charge
liability, brokers are not required to.
– Brokers are required by regulations to separately
account for brokerage revenues and to separate
expenses between brokerage operations and any
other activities.
– The broker regulations, until changed, actually say
that a broker is any party “other than a carrier”
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In sum, for freight charge, freight claims and
vicarious liability reasons, brokerage and
carrier authorities should be in separately
named and distinguished entities.
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• Best practices may be for carriers to outsource
freight through a freight forwarder, rather than
a broker affiliate
• For ease in contracting and risk limitations,
carriers should consider establishing freight
forwarder affiliates for the following reasons:
– Carrier can use either a forwarder or broker
affiliate to comply with FFIT.
– Forwarders, like carriers, accept cargo liability.
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– Based on case law, forwarders can clearly arrange
for truckload transportation.
– Forwarders have statutory recourse to the carriers
they hire for indemnity if they have to pay cargo
claims.
– Forwarders like carriers issue bills of lading, adjust
cargo claims, publish website terms and conditions
and can meet shippers’ expectancy for
transportation service providers.
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• Obtaining a broker’s license whether in a carrier or an
affiliate’s name is not an easy sell to shippers:
– Shippers expect carriers to be “transportation service
providers”;
– Accept cargo liability; and
– Issue bills of lading.
• Carriers previously accepting cargo liability under the
Carmack Amendment cannot easily tell the shipper
that cargo claims must be filed with an unknown third
party when it decides to outsource.
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• Forwarders can meet the $75,000 bond requirement
of FFIT.
• Vicarious liability, negligent selection, freight charge
payment issues and claims handling confusion are all
simplified because the contracted forwarder is the
equivalent of a non-asset based carrier.
• Freight forwarders can obtain primary cargo
insurance not available to brokers.
• Carriers can modify shipper-carrier contract to
provide for electronic issue of forwarder bill of lading
with load confirmation sheet at time of booking.
• This meets FFIT requirement of separate
identification of authority and mitigates vicarious
liability issues.
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Is it better for brokers to guarantee payments to the
carrier or for the broker to warrant payment upon
receipt from its customer through trust accounting?
• The purpose of the bond is to ensure that the intermediary’s
contractual financial obligations are met at least to the extent of
$75,000.
• By statute the broker is required to receive the money from the
shipper and pay the carrier upon receipt (the conduit theory).
• Similarly, under the “Interline Trust Theory” carriers and forwarders
have an obligation to forward payment upon receipt and
subcontracted carriers have similar recourse to shippers. See
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).
• By contract, many brokers guarantee payment within 30 days – but
is it wise to guarantee every shipper’s payment?
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• Is a carrier better off expecting constructive trust
treatment or small intermediary’s payment obligation
surrendering recourse to the shipper?
• The problem with FIFO accounting and intermediary
guarantee of payment militates in favor of trust
accounting as best for small carriers, brokers and
forwarders alike.
• Examples of risk of FIFO accounting:
– Shipper bankruptcy sinks small brokers.
– Surrendering constructive trust and recourse encourages
cross-collateralization of intermediary receivables and
defeats creditors’ rights in bankruptcy.
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How can carriers modify existing
contracts to comply with MAP-21?
• With letter and contract addendum.
• Addendum to contain recitals:
–
–
–
–
To comply with MAP-21;
To permit adequate equipment availability;
To meet shipper’s surge demand; and
To protect the contracted rates.
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• The parties agree that:
– Carrier through its freight forwarder or broker
affiliate may retain other licensed, authorized and
insured carriers upon notice and as needed.
– Broker or forwarder warrants it shall be solely
responsible for the selection and use of qualified
carriers.
– Broker will indemnify and hold harmless Shipper
against:
• Negligent selection and vicarious liability claims;
• Breach of contractual duties by retained carrier
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– Broker and forwarder will invoice Shipper at
contract rates and warrants payment of all freight
charges to retained carriers upon receipt.
– Property broker warrants payment of all cargo
claims per contract terms.
– Addendum to be signed by carrier, shipper and
forwarder or broker.
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Conclusions
• FFIT is just another regulatory burden on the trucking
industry.
• The cost of obtaining a bond is not prohibitive.
• Applicants should exercise care to be sure the vendor
is credible.
• Primary issues involving the broker’s liability for
cargo claims, vicarious liability and payment of
freight charges upon shipper offset or default are
addressed by FFIT and still require careful attention.
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• Past convenience interlining procedures for
door-to-door truckload services are now
forbidden and carriers large or small must use
FFIT as the predicate for:
– straightening out shipper contracts
– establishing best practices for outsourcing freight
by identifying the use of the broker or forwarder
affiliates
– The issuing of electronic bills of lading to
memorialize the identity of the parties at time of
booking
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All parties should equally consider whether the
$75,000 bond should be available if the
intermediary breaches the constructive trust
obligation or whether it is in both parties’ best
interest for the intermediary to act as the sole
party responsible for payment of the services
regardless of shipper insolvency.
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