More recently, shippers have been exposed to the double payment of multi-millions of dollars in freight charges as a result of the demise of major freight bill payment companies.

Now, the demise of Consolidated Freightways, (except for CF Air Freight and Canadian Freightways, Ltd.), the third largest LTL carrier in the nation, and the loss of over 15,000 jobs, threatens to wreak further havoc on the industry both immediately and over the long-term. Of immediate concern, is the disruption of the distribution of freight caught mid-stream in the distribution cycle, the possibility of innumerable loss and damage claims as a result of such a disruption, followed by increased administrative costs to satisfy customers and restore shippers' goodwill. Looking at the long-term view, the demise of CF may result in significant increases in the LTL rate structure offered by all LTL carriers and cause major shifts of LTL traffic.

Several legal issues and conflicts generally flow from a carrier's bankruptcy, which will undoubtedly surface as a result of CF's bankruptcy. Fortunately, our experiences in the undercharge battles of the 1980's and 1990's with collection agencies and bankruptcy trustees provide shippers with guidance as to the proper steps that can be taken to mitigate losses when a carrier files for bankruptcy. These actions include:

A. recovering unpaid loss and damage claims

In order to recover unpaid loss and damage claims against CF, the claimant must determine: if the claims arose either "pre-petition" or "post-petition" (i.e., before or after the date CF filed its bankruptcy petition, which was September 2, 2002). Then, depending upon the timing of the claim and the amount of the claim, the claim may be recoverable against the bankruptcy estate or directly against CF's cargo insurance carrier.

Also, it is important to note that if a claim is ultimately determined to be unrecoverable, it may then be used as an offset to any outstanding debts owed by the claimant to CF, or in the event the claimant is sued in a preference action (see infra).

1. Pre-petition v. post-petition claims

Claims for loss, damage or delay on shipments delivered prior to September 2, 2002 are considered "pre-petition", which means that the claimant will be an ordinary unsecured creditor in the bankruptcy proceeding. Since secured creditors (banks, lien holders, etc.) and employees have preferred status, unsecured creditors will probably only receive a percentage of their claims.

Claims for loss, damage or delay on shipments delivered after September 2, 2002 - that were in "the pipeline" when CF declared bankruptcy - will probably be considered "post-petition", which means that they will be handled as an expense of administration of the bankruptcy estate. Claimants will probably have a better chance of having these claims paid in full.

If shippers experience an excessive amount of damage claims, they may wish to inquire as to how the freight was moved after CF filed for bankruptcy. Information has been received that CF ordered large amounts of freight in its system to be moved by rail to clear its system quickly. Even partially loaded trailers may have been diverted to piggyback or TOFC/COFC service. It is well known throughout the industry, or should be, that traffic moving in this manner must be carefully blocked and braced to withstand the normal rigors of the rail environment. If CF's traffic was not given this special protection, extensive in-transit damage can be expected, and shippers can also expect declinations based on "insufficient packaging", "improper loading", or other standard claim declinations (See Freight Claims in Plain English, 3rd Edition, 1995, Augello & Pezold, Transportation Consumer Protection Council, Inc., Section 11.4, and Vol. II, "One Hundred & One Carrier Declinations, and What to do About Them". www.tcpcinc.com ).

In addition, claimants can expect an inordinate amount of shortage, non-delivered and "mysterious disappearance" claims following a carrier's bankruptcy. These claim problems will be intensified by the fact that after the I.C.C. was sunsetted, and Congress amended the Carmack Amendment, many motor carriers began to limit their liability without their customers' written consent. CF, for instance, first limited its liability to $50 per lb., but later reduced it to $25 per lb. In many cases, discounted rates were subjected to even lower limits without shippers' knowledge or consent. In sum, many claimants will not be able to recover for their full actual losses either from CF or its insurers.

2. Filed v. Unfiled Claims

If claims have been filed prior to the bankruptcy, the claimant will probably be identified as a creditor and will be sent information on the bankruptcy and how to file a Proof of Claim. Claimants should file a Proof of Claim for each claim, and attach or include appropriate supporting documentation.

If claims have not yet been filed with CF, they should be filed according to the normal procedure within nine months. Although there have been no announcements or instructions yet, it is our understanding that administrative offices and functions will be kept open to handle such matters. It is suggested that claims be submitted Certified Mail, Return Receipt to avoid any question, and the claimant should also request and submit a Proof of Claim. Any "post-petition" claims should be clearly identified as such.

3. Filing loss and damage claims against the carrier's cargo insurance carrier.

Normally, claims for loss, damage and delay must first be filed against the carrier If the carrier refuses or is unable to pay a lawful claim, it may be filed against the carrier's cargo insurer, if any.

In CF's case, it was largely self-insured, but was covered by a BMC 83 surety bond in lieu of a BMC 34 certificate and a BMC 32 Endorsement. The coverage under the surety bond is the same as under the BMC 32 Endorsement (See "BMC 32 - The Best-kept Secret in Transportation?", Logistics Management, July 2002). It gives claimants the right to recover directly from the surety up to $5,000 per vehicle, or $10,000 per occurrence, without regard for any deductible or exclusion that may be in the carrier's policy! In other words, if the carrier is liable for the claim, the insurer is primarily liable for the first $5,000 per vehicle, and the claimant may proceed directly against the insurer. In an abundance of caution, claims should be filed in the bankruptcy proceeding as well in anticipation of the surety's attempt to deny liability or limit payments to less than full value.

CF also has a separate cargo legal liability policy for $1 million per occurrence, but which contains a $250,000 deductible. Therefore, claims for amounts greater than $5,000 per vehicle, but less than $250,000 will not be covered by CF's surety bond or its cargo insurer. Those claimants will need to file their claims with the surety company and the Bankruptcy Court. If a claimant has its own cargo insurance policy, claims should be filed against that insurer, which can then subrogate against CF's surety company and/or cargo insurer.

Claimants that shipped under a contract with CF face the possibility that the surety will attempt to deny coverage under the BMC 83 Bond on the ground that even if a contract requires the carrier to maintain a BMC 32 Endorsements, the regulations only apply to common carriers. Shipper interests contend, however, that Congress eliminated the distinction between common and contract carriers in the Interstate Commerce Commission Termination Act of 1995. Therefore, all motor carriers were required to file this Endorsement effective January 1, 1996. This issue is presently pending before a federal district court.

B. The filing of claims for overcharges, loading or unloading allowances, volume discounts, etc. with the Bankruptcy Court within the time limits announced by the Court.

Proof of Loss forms must be filed with the Bankruptcy Court for all past, pending and current claims against CF that may exist for overcharges, unpaid allowances for loading or unloading freight, volume discounts and other amounts due the claimant. The Bankruptcy Court will announce the deadline for filing such claims.

C. The defence of undercharge claims seeking penalties for the alleged late payment of freight charges.

Based on past experience, collection agencies will solicit the bankruptcy estate, subject to the approval of the Bankruptcy Court, to audit the carrier's books and records for the purpose of discovering possible undercharge claims. The most popular type of undercharge claim since the elimination of the filed rate doctrine, have been claims seeking penalties for alleged late payment of freight charges. In such a case, the collection agent will claim that the shipper failed to pay freight charges within the carrier's authorized credit period and as a result is liable for a late payment penalty, which is published in the carrier's tariff.

In CF's case, its tariff provides for interest at the rate of 1.5% per month for outstanding balances beyond 30 days of the invoice date, subject to a minimum of $6.35 per shipment. (Item 432). However, if a claim is placed with a collection agency or attorney, the shipper will be subject to a late payment penalty of 35% of the invoiced amount up to $300, 30% up to $1,000, and 25% on $1000 or more. Recently, A-P-A Transport filed a complaint seeking payment of $881,989 on original freight charges of $106,924, based on its unfilled tariff penalty rule, which would result in an increase of 825%!

Shippers should be aware, however, that there are several court-tested defences against late payment penalties, all of which are explained in detail, with authoritative citations, in "Transportation, Logistics and the Law (Augello, 2001, Transportation Consumer Protection Council, Inc. Details on www.transportlawtexts.com ). For example, it should be noted that the Interstate Commerce Commission, in a decision that was affirmed by a federal district court, held that a 35% penalty for late payment of freight charges was unreasonable. Therefore, to the extent such claims are raised, shippers would be well advised to consult with an experienced transportation attorney to review and respond thereto.

In the interim, shippers owing freight charges to CF should not withhold payment pending the resolution of claims, as they will subject themselves to the tariff-imposed penalties for late payment related above!

D. The defence of "preferential payment" claims

The Bankruptcy Trustee will undoubtedly attempt to recover from shippers all payments made by CF within 90 days of its filing a petition in the Bankruptcy Court, pursuant to a Bankruptcy Rule that presumes such payments gave the recipients a "preference" over other creditors. One of the most common defenses asserted in response to a preference action is the "ordinary course of business" defense.

In order to prevail on this defense, shippers who received the alleged preference payments must prove, among other things, that: (1) CF paid them for overcharges, loss and damage claims, allowances, volume discounts, etc. within the normal time period that CF customarily and historically made such payments to the shipper; (2) according to ordinary business terms or time periods required by law or contract; and (3) in accordance with the ordinary business terms and practices in the industry. Loss and damage claims, for instance, are required by government regulations to be disposed of by motor carriers within 120 days unless a reason for not doing so is given in writing. However, the industry practice is to pay, decline or settle the great majority of claims within 30 days. Under such circumstances, claim payments falling within those parameters would probably not create a preference, but Trustees usually attempt to recover such payments nevertheless. No regulations exist any longer for the payment of overcharges claims, but evidence of the industry's practice should be introduced in defense of these claims.

E. Other considerations

The unanswered question among many shippers is whether or not CF's bankruptcy will eventually impact its sister organizations, CNF Inc. which operates Con-Way Transportation Services, Menlo Worldwide Logistics and other transportation entities. In a press release dated September 3rd, CNF stated that the operations of its companies are not affected by CF's bankruptcy as the two companies "have been unrelated legal entities" since CF was spun off from CNF in 1996. A similar claim was made by Computrex International Inc., d/b/a Computrex Logistics when Computrex Inc. filed for bankruptcy, but the logistics company soon followed into bankruptcy, leaving shippers, carriers and forwarders with about $7 million in unpaid freight charges.

Shipper's most serious concern, however, is to obtain the prompt, safe delivery of their freight caught in CF's system. Reports are being received that other carriers are refusing to pick-up CF's freight without a guarantee of payment from the Bankruptcy Court. Other reports are that carriers are not interested in CF's heavily-discounted freight. Some cartage companies that have picked-up CF freight are reported to be holding it hostage for payment of freight charges owed to them by CF on prior shipments.

These scenarios raise legal questions involving the statutory duty to serve the public on reasonable request and state lien laws. Most state lien laws give carriers a lawful lien only for the freight charges on the shipment in their possession, while a few states (including California) extend the lien to all freight charges owed by the shipper. Carriers that violate the governing lien law can be held liable for damages for conversion.

Conclusion

The impact on the shipping community as a result of the demise of CF will be far reaching. The foregoing issues represent only a sampling of those that the shipping community may face and should be prepared to address in the days, weeks, months and years to come.

William J. Augello was the senior member of the law firm of Augello, Pezold & Hirschmann, P.C., practicing general law and specializing in transportation and administrative law in Huntington, New York. He is now of-counsel to the firm, and is currently an Adjunct Professor at the University of Arizona, teaching Transportation Law based on his new text entitled "Transportation, Logistics and the Law". (See www.transportlawtexts.com for details). williamaugello@worldnet.att.net

Raymond A. Selvaggio practice concentrates in litigation and transactional matters related to transportation and administrative law. He is also Assistant General Counsel to the Transportation Consumer Protection Council, Inc. rselvaggio@transportlaw.com