New broker bond: The 75K solution?

Q: I’ve been hearing a lot about the requirement that motor carrier brokers carry a bond for $75,000. Most of the commentary I’ve encountered has been from the broker industry, and most of it, of course, has been negative. The common idea seems to be that the new requirement is unfair to smaller brokers, and will tend to price them out of the industry.

I’m not sure I agree with this. I acknowledge that a $75,000 bond will be something of a hardship on the small broker, but I think that’s partially offset by the fact that it will help keep fly-by-night scam artists out of the industry. I’ve seen it happen much too often: Somebody opens a new brokerage, lowballs prices to shippers to attract business, sets up with carriers that are scrambling for traffic themselves, moves a lot of freight in a short period of time, collects from the shippers, stiffs the carriers and then disappears. Not long afterward, you often see the same individual setting up shop somewhere else to repeat the same scenario. Anything that will keep these people out of the industry must be a good thing.

Even so, is that the only purpose of the increased bond requirement? I ask this because among all the comments I’ve read about the bond, I don’t seem to find any from people — especially the shippers and carriers that the bond is supposed to be protecting — who express the opinion that it’s beneficial in that regard. Do you disagree?

Apparently, Congress is of the view that $75,000 is a more appropriate bond requirement for the contemporary brokerage industry in terms of offering protection to those who might be injured if a broker went out of business. But will it really have that effect? If so, why don’t I hear people defending it on this basis? Or is the real purpose of the new requirement simply too thin out the ranks of those setting up as brokers?

A: Well, you have something of a point.

The original requirement for a broker bond was conceived in the 1940s when the brokerage industry was structured very differently than it is now. In that era, brokers didn’t collect freight charges from shippers, nor pay carriers directly. The only money they ever had in their hands was that owing to them. The $10,000 bond amount seemed quite appropriate in those circumstances.

Once brokerage morphed into its current form beginning in the early 1980s, however, that $10,000 bond became a joke. A typical broker might incur debts far in excess of that sum in a single day.

The new $75,000 requirement is still the same joke, albeit one with bigger numbers. The amount still falls woefully short of the obligations that even a very small failing broker is likely to leave behind.

For example, one kind reader has shared with me some of the situations that have arisen with a broker who went out of business. The bonding company was so swamped with claims that it felt compelled to turn the matter over to the courts for resolution. The sum of the claims didn’t merely exceed the $75,000 bond, but they dwarfed it, to the point that the best creditors could hope for was a few cents on the dollar after the bond amount was apportioned.

Much worse than that, because the bond company felt obliged to take recourse to the courts for allocation of the payout, claimants were required to pursue their claims through the court system — a process that required them to pay a filing fee of several hundred dollars each (or else forfeit their claims). Add it up. For many claimants, the filing fee would be more than they could reasonably hope to recover.

And it gets worse, in fact. You could scarcely expect the bonding company not to ensure its own representation before the court. So the bonding company would incur legal expenses in conjunction with this matter. One of the bonding company’s early requests to the court was that those legal expenses be treated as a priority claim against the bond, meaning they would come off the top before any money was distributed to other claimants.

Because any claimant with enough money at stake to warrant paying the filing fee also will incur its own legal fees, I can’t imagine anyone except the lawyers is likely to show any profit from this mess.

Thus, to answer your question, I don’t think the $75,000 bond is likely to offer any real protection to shippers or carriers in the case of a broker default. 

Consultant, author and educator Colin Barrett is president of Barrett Transportation Consultants. Send your questions to him at 5201 Whippoorwill Lane, Johns Island, S.C. 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.

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