Opinion: Does the $75,000 Broker Bond Make Sense?
This Opinion piece appears in the Feb. 20 print edition of Transport Topics. By Michael Kelley
FCI
Brokers, freight forwarders and nonvessel operating common carriers, or NVOCC, are required by federal law to carry a surety bond in the event they fail to pay the carrier that performs the move on the shipments they broker. On Dec. 1, 2013, the $75,000 broker bond went into effect — up from the previous bond requirement of $10,000.
The idea of the increased bond amount is, among other things, that it will leave more money from which to recover in the event the broker gets paid by the shipper but does not pay the carrier.
Kelley While plenty of swindled carriers have benefited from the additional bond amount, this increase fails to really address the issue of broker malfeasance or just plain poor money management. Brokers still can run up exorbitant payables to carriers, often to the tune of hundreds of thousands, if not millions, of dollars. They take the money paid to them by their clients or use it for some other purpose or expenditure, and fail to pay the carrier.
Let’s take a look at a very real, and very unfortunate, example. For the sake of clarity, let’s give a quick explanation of how brokers of freight make money. Brokers typically contract with various carriers to move goods at a certain price. Through one method or another, they then find shippers who need freight moved, charge the shippers a higher price than they contracted with the carrier and keep the difference.
In mid-2015, a freight broker ran up a $125,000 balance with a large nationally recognized trucking carrier. The debt mounted simply because the broker was getting paid by the shipper and then failed to pay the carrier. Meanwhile, the money being paid to the broker was being spent on other items until it was all gone.
The trucking carrier then sought the assistance of an attorney to recover the debt. After the attorney contacted the surety company and filed a claim against the bond, the attorney was contacted by the surety company and told that this bond had already been exhausted.
The reason for this is that there were other carriers that found themselves in the same position, and these carriers already had filed claims against the bond.
In fact, the total amount owed to various carriers by the freight broker was in excess of $500,000, completely depleting the $75,000 bond. So in this case, it made absolutely no practical difference whether the bond amount was $10,000 or $75,000. The attorney and the client would not be able recover anything, as the other claims on the bond depleted the bond fund entirely.
Keep in mind that there is no provision in the federal statutes for recourse against brokers for carrier payment as long as the $75,000 bond is in place. If it is depleted, the only recourse is to go after the shipper, who already may have paid the broker, and ask (or sue) them to pay twice.
That’s right: Ask them to pay twice, and believe it or not, there is extensive case law that shows that courts actually have forced shippers to do it. The rationale for this seems to be deeply ingrained in the DNA of shipping, a trade rooted in antiquity. In fact, one court opined that “the bedrock rule of carriage cases is that, absence malfeasance, the carrier gets paid.”
This seems flawed to me. The better approach would be to mandate that all funds received from shippers are held in escrow — a trust fund — and then pay these funds to the carrier. This protects the carrier, the shipper and, ultimately, the broker as well.
Stated differently, brokers should be required to adhere to a fiduciary duty similar to that of a law firm with respect to commingling of funds. A lawyer is required to maintain any client funds collected in a separate account, which is held in trust. And here is a big one: Failure to set up the trust can result in being criminally charged with embezzlement.
This would benefit the carriers and the brokers. When the shipper pays its bill, the carrier would be paid. Brokers no longer would act as guarantors of payment with a limited amount of recovery. And they no longer would need to worry about mishandling funds and having a claim made against their bond — which can put them out of business, at least temporarily.
So while it’s nice that there is more money to recover when a bond claim is made, it still fails to address the issue of broker malfeasance or mismanagement of funds. A federal mandate to hold the funds received by the shipper in trust would be a far better solution.
Kelley is an attorney at law and managing director of FCI, a transportation collections firm.
