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

2 FFIT Legislation / Issues A.Why was FFIT passed? B.What does FFIT require? C.What is FFIT’s current regulatory status? D.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?

3 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.

4 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.

5 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.

6 C. What is FFIT’s current regulatory status? After much confusion, the bonding requirements went into effect on December 1, 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.

7 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.

8 Persons authorized to issue bonds and trust agreements include: –Sureties which appear on the US Department of Treasury list of approved sureties. See –Banks or finance companies: approved by the agency under 49 C.F.R (c) Which maintain corpuses composed of: –$75,000 in readily available assets; –Not contingent on personal guarantee or pledged receivables.

9 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.

10 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.

11 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.

12 –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.

13 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.

14 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 non- profit 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.

15 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. D. What effect does FFIT have on industry?

16 Discussion of the requirements of FFIT and its affect on carriers.

17 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). E. Does FFIT eliminate freight charge payment issues with intermediaries?

18 The systemic issue of who is responsible for paying the freight charges: –The broker or forwarder; –The shipper; –The consignor; –The consignee.

19 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)

20 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).

21 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. F. What should be brokers’, forwarders’ and carriers’ best practices in light of FFIT?

22 Implementation Issues Presented by FFIT Question: Is it better to split operations of intermediaries into corporations separate from motor carrier services?

23 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.

24 –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”

25 In sum, for freight charge, freight claims and vicarious liability reasons, brokerage and carrier authorities should be in separately named and distinguished entities.

26 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.

27 –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.

28 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.

29 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.

30 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?

31 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.

32 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.

33 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

34 –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.

35 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.

36 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

37 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.