Shipper Bankruptcy: Can a Broker Sue the Consignee?

John Anderson Q & A, Transportation

Facts:  A broker’s shipper/customer has been operating under Ch. 11 (reorganization), but recently converted the case to Ch. 7 (liquidation).

Question:  Can the broker collect its freight charges from the consignees even though they have already paid the charges to the bankrupt shipper?

Answer:   Probably, but you need to proceed with caution.

“Automatic Stay.”  The bankruptcy code provides for an automatic stay immediately upon the filing of a bankruptcy petition by a debtor. No legal proceeding may be commenced or allowed to continue once the petition in bankruptcy is filed. This also would extend to claims against assets of the bankrupt debtor. The automatic stay prohibits you from taking any action against the bankrupt debtor or the bankrupt debtor’s assets. Everything immediately becomes subject to the exclusive jurisdiction of the bankruptcy court.

However, in this case the consignees have already paid the bankrupt debtor. As a result, the action is not seeking to recover “assets of the estate” or filing any sort of claim against the bankrupt debtor. Thus, the automatic stay should not apply in the action against the consignee.

“Prepaid” vs. “Collect.”  If the bill of lading was marked prepaid, then the shipper/consignor is/was liable for the payment of freight charges. If the bill of lading was marked collect and/or the “Section 7” box was signed or other non-recourse language was indicated, then the consignee is liable for the payment of freight charges.  If the bill of lading was not marked as either prepaid or collect and there was no Section 7 or non-recourse language signed, then the default rules apply. (For more information see our previous article discussing the Oak Harbor Freight Lines v Sears Roebuck Co. case.)

“Estoppel Defense.”  Even if the bill of lading indicates that the consignee is liable for the payment of the freight charges, the consignee likely will argue that the broker/carrier is prohibited from collecting the freight charges from the consignee since the consignee should not be made to pay twice. This defense is sometimes upheld, especially when the carrier has done something that misled the consignee, such as not saying anything about payment of freight charges upon delivery or sending the bill to the shipper and not the consignee. The terms of the applicable contract, if there is one, and the normal course of dealing also will apply.

However, the estoppel defense is not always upheld, and there are an equal number of cases that have held that the carrier can collect the freight charges from the consignee even though it means the consignee will have to pay twice. The Oak Harbor v Sears case is an example–Sears was required to pay over $200,000 in freight charges twice.

Recommendation:

Care must be taken before going after a consignee after a shipper has filed bankruptcy. Legal counsel should be obtained to confirm that the automatic stay does not prohibit action, the bills of lading and transportation contracts should be reviewed for payment arrangements, and  a carefully worded demand letter should be prepared to make sure the proper analysis for liability is made and the estoppel defense thwarted at the outset.  You also need to determine what level of effort the claim amount justifies. You may find that smaller claims can be recovered, at least in part, by minimal effort with a demand letter from a lawyer and without the need for a lawsuit. On the other hand, large claims may justify further legal effort and possibly litigation.