In trucking's most fiery debate, brokers typically say that enforcing 49 CFR 371.3, commonly called "broker transparency," represents a dated, bad idea for the trucking industry that would create a "race to the bottom" on rates and bury the industry in paperwork.
Small trucking business owners, on the other hand, counter that they think rates would improve if they got better visibility into individual brokers' charges to shippers, and that with all the freight tech and carrier vetting generating its own mountains of paperwork and disputes, what's one more page?
Individual owners' fight for transparency has led to at least one lawsuit filed against a major broker.
But a group of transportation law experts have quietly argued now for years that broker transparency is important for another reason: Cracking down on fraud and basic theft, the kind bad-actor brokers perpetrate against truckers and don't typically like to talk about.
In comments filed in response to the Federal Motor Carrier Safety Administration's current broker transparency proposed rulemaking, attorneys Henry Seaton and Mark Andrews argue on behalf of a bevy of supply chain stakeholder groups that the rules need enforcing to cut down on fraud and embezzlement.
"The actual existing recordkeeping requirements for brokers in 49 CFR Parts 371 and 378," they wrote, "currently require the maintenance and production of documents that are essential to determine regulated carriers’ compliance with rules of commerce for civil and criminal litigation, to address carriers’ rights in broker bankruptcies, as well as to facilitate production of records essential for the tracing of both stolen freight" and brokers' embezzlement of money rightly meant for trucking companies.
The comments openly lament the talk of transparency's impact on rates and instead focuses on how brokers need to be transparent to facilitate legal proceedings.
[Related: Broker transparency: 8 in 10 owner-operators predict positive impacts for rates]
"Unfortunately, much of the 'transparency' rulemaking has gone off the tracks with a lengthy treatment of the existing brokerage regulations without considering their purpose in preventing fraud and holding intermediaries accountable with a timely and proper transmission of earmarked funds to the carrier upon receipt," they wrote. "The federal recordkeeping requirements of 49 CFR Parts 371 and 378 provide access to broker and carrier transactional records useful to protect victims’ rights in civil and criminal litigation as to fraud, embezzlement, larceny by fraud, and other statutes."
The lawyers argue that requiring brokers to produce documents that prove they've complied with "the broker rules mandating segregation of funds and preservation of transactional evidence showing (a) that carriers delivered interstate loads intact and (b) that brokers received freight charges and transmitted to the carriers their portion of the payments upon receipt without embezzlement or misapplication" represents a vital function of the regulation, which today goes unenforced.
Speaking to Overdrive, Seaton summed up the thrust of the comments: "Don’t tinker with 371," he said. "There are multiple important things primarily related to small carriers and their ability to get documentation needed not only for fraud but also for bankruptcy purposes and having a special argument that the money is our money, and brokers can’t pledge, hypothecate or pay on a FIFO [first in, first out] method without basically embezzling."
Why is it so important that brokers keep their funds "segregated" and make sure money from shippers goes straight to carriers, minus a margin, without any other strings attached?
Think of Convoy's bankruptcy. A company once valued at $3.8 billion goes bankrupt with thousands of loads in motion. Carriers all get an email telling them to complete delivery and they'll get paid, only dozens of carriers owed millions of dollars never see a dime and at least two major interpleader lawsuits spring up to answer the question of who gets paid. Convoy's $75,000 bond evaporates almost instantly, and later the business sells its technology platform for about $10 million to Flexport, who just re-opens the app with some mods and invites the jilted carriers to haul for them again. Only the $10 million Convoy gets from Flexport does not go to the carriers, who nobody disputes actually hauled the loads and deserve payment. A bank, Hercules Capital, gets special status in the bankruptcy proceedings as a secured creditor, while the carriers look on as unsecured creditors.
Convoy was "hiring carriers, so they had an obligation to pay the carriers when they got paid by their customer," said Seaton. But Convoy "obviously robbed Peter to pay Paul" and "deprived carriers of their right" in bankruptcy proceedings to claim Convoy's receivables, as they'd already been pledged to a bank.
In the Appendix to comments Seaton made on the definition of brokers and bona fide agents, it becomes clear why it's so important to establish the paper trail between loads hauled and monies received:
"An established entity with carrier authority and a lapsed broker’s bond cross-collateralized its broker and carrier operations, pledging both to a commercial factor. For several years it consistently lost money, but made no accounting of its receipt of advanced payments from the factor. After it exhausted the cash flow, its owners filed for personal bankruptcy listing over 3,000 carrier creditors with the amount due shown as uncertain. The factor claimed secured creditor status. Four carriers sought special creditor status in bankruptcy showing outstanding receivables in the amount of $1,042,329.50. Neither the bankrupt entity, its owners nor the factor cooperated."
Seaton concludes in the Appendix section of those comments that FMCSA did not support carriers' requests for access to records, and that the bankruptcy court ultimately dismissed the carriers' efforts to get paid.
While Seaton and company don't support FMCSA's proposal on broker transparency for lots of technical reasons, such as how it relates to FMCSA's registration modernization efforts and procedural quarrels with how FMCSA brought the proposal, they make a strong case for the need for transparency in brokered freight transactions that has nothing to do with rates, and everything to do with carriers' rights to be paid for services rendered, and to pursue that payment to the fullest extent of the law.
[Related: Convoy back in court: 100s of carriers seek $2.46M for unpaid loads]
