TO PAY OR NOT TO PAY?
Suffering The Outrageous Demands And Claims
Against Bankruptcy Creditors For Unpaid Shipping Charges.
By Richard Macias

Credit managers frequently wear many hats. Often, in companies that do not have an in-house legal department, that extends to administrative responsibility for legal matters that involve bankruptcy. This may include not only claims on unpaid invoices, but preferences and other demands that sometimes arise as a result of a bankruptcy.

One such circumstance relates to collection claims by a common carrier, usually a domestic trucking or shipping company. Typically in such cases, the bankruptcy Debtor is a seller/vendor that shipped goods to your company. The Debtor is in a “no asset” bankruptcy situation. There are allegedly unpaid shipping charges for the goods delivered to your company. Commonly in these transactions, the bill of lading that went with the shipment shows the goods were shipped to your company as “freight prepaid”.

The shipping company, like all other potential creditors, is subject to the automatic stay on collection actions against the Debtor under Bankruptcy Code § 362. As a result, the shipping company will get a very small distribution from the Debtor if the unpaid shipping charges are treated as an unsecured claim against the Debtor’s estate. The shipping company is looking for a deep pocket from which to recover the unpaid shipping charges so it directs its claim to your company as the consignee/buyer and demands payment from you.

Is your company liable for those shipping charges? (Universal Am-Cam, Ltd. V. Northwestern Steel and Wire Co., 2002 WestLaw 88924 (U.S. Dist. Ct. N.D.Ill., Jan 2002)).

Facts of the case
The Universal case specifically deals with the question of whether the § 362 automatic stay that prohibits all action directed against the debtor on collection claims also bars a creditor freight carrier from enforcing those same claims indirectly by suing third party consignees, like your company, for unpaid shipping charges.

In Universal, bankruptcy Debtor Northwestern Steel and Wire Co., brought a contempt action in the Bankruptcy Court against Universal Am-Cam, Ltd., a freight carrier. The Debtor alleged that Universal violated the automatic stay by attempting to collect pre-petition shipping charges from the Debtor’s customers. Universal had transported products to the Debtor’s customers under shipping contracts or bills of lading with the Debtor. The customers were the consignees of the bills of lading. After Debtor filed its bankruptcy, Universal attempted to collect unpaid shipping charges from the customers/consignees. Universal sent demand letters to the customers/consignees asserting their liability for the unpaid freight charges based on their acceptance of delivery.

Position of the Parties
Universal argued to the court that it had not violated the automatic stay by seeking recovery against the Debtor’s customers/consignees. Universal based its argument on the federal Interstate Commerce Act and court cases interpreting that act as prohibiting discriminatory rate practices. According to Universal, under that federal law, the customers/consignees were liable for the unpaid freight charges based on acceptance of delivery, even where the seller/consignor was initially liable for the charges based on “freight prepaid” bills of lading. Universal’s position was that it had claims against the customers/consignees that would be independent of the claims it might have had against the debtor so the collection activity was not barred by the automatic stay.

The Debtor asserted to the court that allowing Universal to continue its collection activity would interfere with the Chapter 11 reorganization process by alienating the Debtor’s creditors. The Debtor argued that it alone was responsible for the unpaid shipping charges that had been included in the invoices for the products shipped by it to its customers/consignees so the automatic stay precluded the collection actions by Universal.

Courts Ruling
The Court agreed with the Debtor that under cases interpreting the Interstate Commerce Act, the shipping company’s claims would be subject to an arcane rule known as the “estoppel defense.” This rule is applied to avoid the situation where the customer/consignee might be subject to double payment, first on the seller’s invoice and then in a later suit by the carrier to recover the same freight charges. If the Debtor could prove that its pre-petition invoices that included freight charges had been paid by its customers/consignees, then the shipping company would be obligated to proceed in the Bankruptcy Court on its claims against the Debtor only.

The Universal court held that the Debtor had not met its burden of proving that the invoices had been paid by its customers/consignees. As a result, Universal’s collection efforts against the Debtor’s customers/consignees was not prohibited by the automatic stay.

Lessons
The interrelationship of bankruptcy law and other federal law is a complex one. Often, decisions in bankruptcy matters will turn on the application of rules that arise outside of the bankruptcy court. Occasionally, in this multifaceted mix, rules which have evolved as part of the bankruptcy scheme to protect the debtor may have a collateral benefit for you. The “estoppel defense” is an example of such a rule. The Universal case is a reminder that, where bankruptcy is involved, you should be very cautious, and perhaps seek legal counsel, before responding to any demand for payment, whether it comes from the debtor or trustee in the form of a preference demand, or from some other creditor that may in fact be “estopped” by law from asserting the claim against you.

Richard Macias is a partner of the Los Angeles creditors' rights law firm of Creim Macias Koenig & Frey LLP. He may be reached by telephone at 213-614-1944 and by email at rmacias@cmkllp.com