08/07/07

Court Decisions

COGSA Package Liability Limitation

What is a COGSA "Package"? by William J. Augello

Groupe Chegaray/V. De Chalus v. P&O Containers, 251 F3d. 1359 (11^th Cir., 2001)

The following two cases relate to the “conduit theory.” In the first case, the court notes that funds received by an intermediary from shippers may not be the property of the intermediary but rather might belong to the carrier providing the service, and held by the intermediary in a constructive trust.  In the second case, the court discussed whether a broker was obligated to pay a carrier if it never received payment from the shipper.

Bank Does Not Have Lien on Freight Charges Collected by Broker

In a dispute between the bank that lent money to a broker that went bankrupt and the assignee of the motor carriers that performed the service, the U.S. District Court denied the bank’s motion for summary judgment seeking to impose a lien on the freight charges collected by the broker for the carriers’ services.   While the court held that there was an issue of fact that precluded it from imposing a constructive trust on the funds collected by Freight Peddlers, it noted that industry practices and “the federal regulations at 49 U.S.C. §§ 371.4(a)(4) and (6) clearly contemplate that brokers such as Freight Peddlers may act as a conduit by collecting freight charges owed to the motor carrier, and making appropriate payment to the carrier, less any brokerage charges,” and that if the broker was merely a conduit, it would most inequitable to allow the broker to use the collected freight charges to pay off its loan from the bank.

Freight Peddlers was a property broker entrusted to collect all freight charges owed from the shippers to the motor carriers for the carriers’ services.  After Freight Peddlers deducted its commission, it was then required to pay the collected charges to the motor carriers.  At issues was some $162,215.80 in freight charges that Freight Peddlers had collected, but failed to pay the motor carriers.  Instead, defendant Bank of Walterboro, which had extended a $300,000 line of credit to Freight Peddlers, allegedly took possession of the money pursuant to its security interest in Freight Peddlers’ accounts receivable.

The plaintiff, as assignee of the motor carriers’ claims, argued that the funds collected by Freight Peddlers were held in trust for the carriers’ services.  The bank argued that it had a valid lien on Freight Peddlers’ accounts receivable, including such freight charges.  While the court would not impose a constructive trust based upon the facts before it, the court noted that there was a critical distinction between whether

“Freight Peddlers would ordinarily pay the motor carriers from its own general funds before receiving the shippers’ payments, rather than simply forwarding the shippers’ payments, less any brokerage fees, to the carriers.  If the former practice controlled, and Freight Peddlers accordingly bore the risk of nonpayment from shippers, then the imposition of a trust might not be warranted.  If, however, Freight Peddlers simply forwarded the shippers’ payment to the carriers, then it would be acting as a conduit, and federal law would call for the court to impose a trust.”

Transportation Revenue Management d/b/a TRM v. Freight Peddlers, Inc., 2000 WL 33399885, Fed. Carr.Cas. ¶ 84,141 (U.S.D.C. SC September 7, 2000)

Broker Not Liable for Freight Charges if Shipper Does Not Pay

A Missouri trial court reasoned that if a broker is merely a “conduit” for freight charges, it’s not obliged to pay the carrier unless it receives funds from the shipper. 

The motor carrier was suing a broker for unpaid freight charges.  The broker argued that the bill of lading provided carrier “with express notice that [the shipper, HEI] as the shipper/consignor, consignee and/or beneficial owner of the shipments was the only party liable for freight charges.” 

The trial court granted the broker summary judgment, noting that:

The bills of lading establish that [shipper HEI] was responsible for payment of freight charges and not [Defendant].

As [Defendant] neither collected the freight charges from [HEI] nor clearly assumed liability by contract or conduct, neither of the two circumstances in which a broker or agent can be held liable for freight charges is present in this case.

While noting the above, the appeals court reversed the trial court’s granting of summary judgment on other grounds and remanded the case because it found that there was clearly a dispute as to a genuine issue of material fact regarding whether or not the transportation was governed by the bills of lading or a bilateral transportation contract.

New Prime, Inc. v. Professional Logistics Management Co., Inc., 28 S.W. 3d 898 (Mo.App.S.D.  October 19, 2000)

First Circuit Upholds FedEx Liability Limitation

On a subrogation claim by insurance company seeking to invalidate FedEx’s $100 limitation of liability, the First Circuit Court of Appeals affirmed the District Court’s decision upholding the validity of FedEx’s liability limitation and denying the plaintiff’s attempts to amend the complaint to include Carmack Amendment claims and claims for willful and wanton misconduct.

The shipper tendered eight packages containing jewelry to FedEx and only one arrived at its destination, and it was empty.  The shipments were made under FedEx’s Master Powership Agreements, which note that FedEx limits its liability as provided in it Service Guide.  The Service Guide provides that liability is limited to $100 per package unless a higher value is declared on the airbill for the package at the time of tender, and an additional charge is paid.  While FedEx allows shippers to declare a value up to $50,000 for most types of goods, it limits the maximum liability to $500 per package for “items of extraordinary value” such as jewelry.  The shipper did not declare any value on the shipments involved, but did purchase insurance from the plaintiff, who stands in place of the shipper.

The released value doctrine allows an air carrier to limit its liability for injury, loss, or destruction of property on a “released valuation” basis.  In exchange for a lower shipping rate, the shipper is deemed to have released the carrier from liability beyond a stated amount and will be bound if he had reasonable notice of the rate structure and was given a fair opportunity to pay a higher rate in order to obtain greater protection.

The plaintiff insurance company argued that the contractually allowed increase to $500 of coverage was an insufficient difference to provide “fair opportunity,” particularly when FedEx actively solicited the carriage of jewelry clearly worth more than $500.  The court declined to determine what alternative was sufficiently high so as to provide a fair opportunity to the shipper, so long as there was a choice of rates. The court noted that the plaintiff conceded that the released value doctrine does not require carriers to offer a full value rate.

The court also noted that the fact that third-party insurance was available, and was purchased by the shipper, counsels against invalidating the limitation on liability because a shipper cannot contend that it was not given a “fair opportunity” to opt for higher coverage when the shipper did in fact opt for higher coverage by insuring its package through an independent entity.

In affirming the district court’s denial of plaintiff’s attempt to amend its complaint to include Carmack Amendment claims because four of the packages allegedly traveled entirely by ground, the court of appeals agreed with the district court that “with respect to the fair opportunity to declare a higher rate, the constraints on limitation clauses are the same for motor carriers covered by the Carmack Amendment as they are for air carriers covered by the released value doctrine” and the results would have been the same.

The plaintiff also sought to amend its complaint arguing that the conversion exception to the released value doctrine should apply because of FedEx’s alleged willful and wanton misconduct by failing to take any meaningful action to prevent rampant employee theft of which it was aware.  The plaintiff did not assert that FedEx had converted the property for its own use or gain.  In affirming the district court’s denial of plaintiff’s attempt to amend its complaint to include these claims, the court of appeals held that willful blindness to the activity of third parties (even employees) does not qualify for the conversion exception.

Kemper Insurance Co. v. Federal Express Corp., 252 F.3d 509 (1^st Cir. June 12, 2001)

Human Error Excluded from Ocean Marine Policy Coverage

The shipper was out of luck when it lost a shipment of frozen shrimp because someone forgot to plug in the refrigeration unit on the land leg of an ocean shipment.  The 10^th Circuit Court of Appeals upheld the lower court ruling that under admiralty law, “the failure to attach a gen-set did not constitute a ‘derangement or breakdown of the refrigeration machinery,’” which would have been covered by the ocean marine cargo insurance policy.

Sea Harvest arranged to ship a load of shrimp from Bangkok to Philadelphia with Sea-Land Service, Inc. and obtained an ocean marine insurance policy from the Commercial Union Insurance Co.  The refrigeration clause in the policy covered “all risks of physical loss or damage from any external clause,” but excluded “deterioration, decay or spoilage unless the assured can demonstrate that such damage was directly caused by derangement or breakdown of the refrigeration machinery, or directly caused by the vessel stranding, sinking, burning or in collision.”

At some point before reaching Philadelphia, Sea-Land failed to attach a gen-set – the device that provides electrical power to the cooling element in a refrigerated container – to the cargo container with the shrimp, creating a total loss and Sea Harvest filed a claim for $230,005.79 with Commercial Union.  Commercial Union denied the claim as based upon the exclusion.  The district court ruled in favor of the insurer, determining that under admiralty law, failure to attach a gen-set did not constitute a “derangement or breakdown of refrigeration machinery.”

On appeal, the court noted that “derangement or breakdown does not apply to the (human) failure to operate the refrigeration machinery. In order to be ‘deranged,’ machinery must have some functional disorder in its own operation, as distinguished from a simple failure to operate it.”

Commercial Union Insurance Co. v. Sea Harvest Seafood Co., 251 F.3d 1294 (10^th Cir. June 11, 2001)