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Many Basement Brokers Can’t Make Bond. Good for Shippers?

March 31, 2014
QUESTION: Many Basement Brokers Can’t Make Bond. Good for Shippers?

One of the provisions of the MAP-21 Highway Funding Act was that the minimum broker surety bond be increased from $10,000 to $75,000.  As a result, there are at least 7,500 fewer authorized brokers with active operating authority. The Owner-Operator Independent Drivers Association (OOIDA) supports the increase as a way to ensure truckers are paid for loads hauled, as the previous $10,000 minimum often wasn’t enough to make up for over-extended brokers. The TIA says the impact to the brokerage and trucking industries will be “minimal, if nothing at all”. Also as a direct result, the industry is now in the hands of larger brokers.” Is this good or bad for shipping?

David Sparkman
Founding Editor of ACWI Advance Newsletter
(American Chain of Warehouses Inc)
David Sparkman Consulting

A group calling itself the Association of Independent Property Brokers & Agents (AIPBA) is pursuing a lawsuit and legislation to overturn the bond increase, but their prospect of success in either arena seems unlikely. The primary issue that arose late last year was when it was discovered last December that some 2,000 brokers out of the universe of 9,000 holding interstate operating authority lost their operating rights for failure to post the new bond. The information was publicized by Michael Curry, the owner of a broker called My Carrier Resources, but when trade journalists looked into it they quickly found that the numbers Curry had located on the FMCSA website most likely included many brokers who had gone out of business years earlier but had never reported it to the government. A similar thing happened following the 1980 trucking deregulation when tens of thousands of truckers were said to have lost their operating authority, but upon analysis it turned out that over the years the government had recorded everyone who had obtained a new interstate license but had never removed anyone from the list! Other than the AIPBA lawsuit, I haven’t heard a peep out of anyone regarding this as an issue.

Enan E. Stillman
Corporate and M&A attorney
Graham & Penman LLP

The bond increase has been the subject of public debate, and sparked a public fight between the TIA, the largest brokerage industry group, and AIPBA, an industry group that represents small brokers.  The TIA supports the bond increase, whereas AIPBA is a vociferous opponent of the increase and has filed suit in an attempt to vacate the applicable law.

Despite the concerning statistical data, I think the impact of the bond increase is somewhat overstated.  Admittedly, the bond increase has forced many small “basement brokers” out of business because they cannot afford to pay a $75,000 bond amount; however, it should not act as a restraint on the basement broker’s trade.  Ultimately, those same basement brokers can keep their existing clientele and work as freight agents for larger brokerages (sometimes called agent providers) that hire independent contractor freight agents.  This agency model, as opposed to the employee freight broker model, is a very common arrangement under which freight agents use the operating authority, transportation management software, carrier base, and bond of the agent provider/large brokerage and, in return, the individual freight agent pays to the agent provider a percentage of the net margins earned by arranging for the transportation of freight.  If the individual’s book of business grows, naturally they can afford the bond and open their own shop.

From a practical standpoint, I think carriers will file more often on a solvent broker’s bond, and will use the threat of filing as leverage against brokers who want to offset transportation charges owed to the carrier against some form of loss, delay penalty, or other indebtedness that the broker incurs to its shipper customer.  Typically, brokers and carriers execute an agreement pursuant to which brokers are often given the right to offset freight claims from transportation charges.  Even if the right to offset is not expressly permitted in a contract, brokers will unilaterally offset charges regardless because it’s easy to do so, and because brokers want to pass on to the carrier any hidden penalties, fees and liquidated damages the broker incurs under their shipper-broker agreements. Carriers, and the factoring companies that buy or lend against the carriers’ receivables, hate this arrangement and prefer that the broker’s only recourse for freight loss is to file a claim against the carrier’s cargo liability insurance carrier.  The ability to file on a large bond and the hassle that the claims process entails may serve to limit or curb a broker’s desire to exercise a unilateral offset against a carrier’s transportation charges.    

At the end of the day, the three entities that benefit the most from the bond increase are large brokerages, carriers and shippers.  Large brokers will increase in size due to an influx of new, basement broker talent and market consolidation, while carriers benefit by increasing their leverage against a broker. In addition, carriers that transport freight for an insolvent broker can now recover a larger amount of money as they will share pro rata in a $75,000 pie.  Finally, a shipper’s exposure to small, illegitimate, fraudulent brokers is reduced because the barrier to entry (i.e., formation of a shell brokerage) has increased dramatically. 

Ultimately, the bond increase is more positive than negative, but perhaps it would have been less controversial if the amount was increased threefold to $30,000 instead of seven and half times to $75,000.  Either way, just don’t tell that to AIPBA.

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