Q: We’ve recently discovered that one of the brokers we’ve been using is factoring its receivables. Our accounts payables people have been given instructions to pay the factor, and not the broker.
That doesn’t cause us a problem by itself, because it’s merely a matter of redirecting our payments. But since I was advised of the situation, I got to thinking: What if the broker doesn’t pay the carrier and the carrier comes back to us for its own payment. In that case, we wouldn’t have a record of having paid the broker, because our payment went to the factor instead. What would be our defense to the carrier’s demand for payment?
It seems to me that this situation has the potential to leave us vulnerable for double-payment of freight bills, first to the factor and subsequently to the carrier. Am I being paranoid about this, or is the double-payment possibility a genuine concern? Should I question our broker about this? Can you clarify for me?
A: You’re not being paranoid at all, but I think you’re worrying unduly about the factoring situation. The risk of double-payment is no greater than it would be if the freight bills weren’t being factored.
For readers who aren’t familiar with freight bill factoring, let me first clarify. Any vendor, whether of goods or services, on occasion may find itself confronting a cash-flow crunch due to normal delays in payment of its receivables — its invoices to its customers. The money it’s expecting from those customers, that is, doesn’t show up quickly enough for it to meet its obligations.
There’s a whole industry that’s grown up to help with such problems. They’ll “buy” the vendor’s outstanding receivables — at, of course, a discount — and front the needed cash. This is a common practice in the transportation sector, and it’s been extended to transportation brokerage. The law on this provides that, once the customer/debtor is notified of the transaction, payment must be made to the factoring company that “purchased” the bill rather than to the original vendor to whom it was owed. The debtor has no choice in the matter; payment not in accordance with the factoring notification does not discharge its obligation.
Payment to the factor does discharge that obligation, however, meaning it constitutes legal proof of payment to the original vendor. That, I think, should resolve the main concern you expressed. Coupled with the notification, your proof of payment to the factor is just as good as proof of payment to the broker. Thus, you’re not in any different situation than you’d be if you made your payment directly to the broker.
This isn’t to tell you, though, that you’re necessarily free and clear if the broker failed to pay the carrier and the carrier thereafter comes back to you for its unpaid charges. I’m simply saying your defense isn’t compromised because you paid the factor and not the broker; it’s the same. There have been cases where a shipper’s payment to a broker hasn’t been deemed adequate to protect itself against a carrier’s demand for direct payment of its own charges, and that possibility still exists.
One thing I can tell you is the factor itself won’t incur any obligation to the carrier. It merely purchased the receivable; it didn’t also take on any indebtedness the broker may have had to any other party, no matter how directly related to that receivable. In their Internet advertising, some freight bill factors make an issue of sanctimoniously declaring their expectation that brokers will use the proceeds of the transaction to pay off carriers first and foremost, but that’s beside the point; as a factor, they’re not legally responsible for debts of those from whom they buy freight bills.
I would recommend, however, that you be alert to one possibility: If the carrier makes its demand for direct payment to you before you’ve made your payment to the factor, it’s no different than if you were paying the broker itself. Don’t, in those circumstances, pay anybody until you’ve gone before a court. In Ranger Transportation v. Wal-Mart Stores, 903 F.3d 1185 (U.S.C.A. 8, 1985), for example, the shipper’s obligation to the carrier was considered to take priority over its obligation to the broker in those circumstances.
The involvement of the factor adds a complication that you shouldn’t try to sort out yourself. No matter how strongly the factor tries to insist, you should let a court settle the dispute before making any payments.
Consultant, author and educator Colin Barrett is president of Barrett Transportation Consultants. Send your questions to him at 5201 Whippoorwill Lane, Johns Island, SC. 29455; phone, 843-559-1277; e-mail, BarrettTrn@aol.com. Contact him to order the most recent 351-page compiled edition of past Q&A columns, published in 2010.