Q: I was hoping your expertise could help me out. I’m a freight agent, and my company overpaid a freight invoice by $1,000 to the carrier's factoring company. We forgot to deduct for a $1,000 advance via comcheck.
Naturally, we have all the documentation showing the driver cashed the check. I tried to work out repayment with the carrier, to which they agreed, but they have yet to pay it back.
My question is who is responsible for paying back the overpayment, the factoring company or the carrier? I have now reached out to the factoring company and forwarded all the appropriate documentation backing up our claim of overpayment.
A: I’ve done a little research, but can’t find any past court cases that really match up with the facts you present, which means we’ll have to go with logic and the general run of legal thinking about the rights of factors and those of people (like you, in this case) who deal with them.
I assume most of my readers are familiar with invoice factoring. It occurs when a company, to improve its cash flow, sells off the rights to its accounts receivable to a third party at a discounted rate in exchange for immediate payment of what it’s due from its customers (less the discount, of course). It’s a not-uncommon scenario in transportation, especially among motor carriers, and a number of financial services firms specialize in this type of business.
The Uniform Commercial Code recognizes this sort of transaction and has a lot to say about protecting the rights of the third parties who factor commercial invoices. The law comes down pretty heavily on their side, I’m sorry to tell you, but I guess that makes sense, considering the factors are those who put their capital at risk.
Basically, the factor did nothing wrong here, even if it was the party that actually invoiced you. It was simply passing on information it received from the carrier, which clearly didn’t tell it anything about your advance to its driver. Moreover, the factor presumably made its outlay to the carrier based on the full amount of the freight bill with no accounting for that advance, meaning it’s out that full amount (less, again, the discount).
Now, the carrier isn’t blameless here. Presumably, it knew about the advance at the time it sold the freight bill to the factor and neglected to tell the factor about it. (I suppose it’s also possible that the company was ignorant of the advance if you paid the driver directly and were lax about informing his or her employer, but that’s pretty unlikely unless you were awfully sloppy with your accounting, which is another matter.)
But you, too, were at fault. For whatever reason, you didn’t reconcile your payments and your payables in time to avoid the overpayment. Had you done so in a timely fashion, the factor would have been in a position to contra-settle with the carrier to take into account the short payment, which it now isn’t because of your mistaken overpayment.
All right, take what I’ve just said and figure for yourself what’s fair and reasonable here. Should it be the factor that has to give you your money back or the carrier? If you come up with any answer other than the carrier, I’d have to seriously question your objectivity in evaluating the situation. And I’m pretty sure that, if you were to take this matter to court, the court would agree, based on the law and common equity.
You say you’ve reached an agreement with the carrier for a refund, although the carrier hasn’t yet honored that agreement. If this situation continues and you’re still doing business with the carrier, it would be perfectly appropriate and legal for you to deduct the amount from any future freight bill you may owe it. And that holds true whether or not that future bill is also factored (although you’ll have to explain the situation to the factor if it comes up).
The point is that nobody can sell something to anyone else if the seller doesn’t own it. In this case, what the carrier owns is only its right to the net amount that you owe it. If it sells more than that to the factor, the factor will have the right to contra-settle as soon as it becomes aware of the carrier’s overstatement of the amount. Thus, your right to pay only the net you owe isn’t compromised so long as you assert it timely.
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; email, BarrettTrn@aol.com. Contact him to order the most recent 351-page compiled edition of past Q&A columns, published in 2010.