July/August 1992
The undercharge claim problem is growing, and scrap recyclers need to know how to protect and defend themselves against this threat.
BY KENT KISER
Kent Kiser is associate editor of Scrap Processing and Recycling.
Four years ago, Shelly Derer had never heard of motor carrier undercharge claims, much less received any. Today, Derer—president of Shelmet Corp., a scrap brokerage firm in West Palm Beach , Fla.—has received undercharge claims totaling more than $20,000 from two bankrupt trucking companies, prompting him to become a crusader against the practice he calls "morally wrong and legally corrupt."
Most of Shelmet's claims have come from P.I.E. Nationwide Inc., a large motor carrier that went bankrupt in 1990. The two companies started working together in 1988 when P.I.E. offered competitive discount rates to Shelmet in an effort to fill backhaul routes from Florida to points north. For two years, Shelmet and P.I.E. enjoyed a win-win business relationship: P.I.E. filled its trucks and provided satisfactory service, all charges were billed accurately and in a timely manner, and Shelmet paid the bills on time and in accordance with P.I.E.'s quoted prices, Derer explains.
After P.I.E. declared bankruptcy, the situation took a tragic turn: P.I.E.'s bankruptcy estate trustee began billing Shelmet and other P.I.E. customers for the difference between the freight rates they negotiated with P.I.E. and the tariff rates filed with the Interstate Commerce Commission (ICC). All of a sudden, Derer says, "we owed as much as four times the agreed-upon price for such shipments."
Shelmet's story is only one in the mushrooming threat of motor carrier undercharge claims. How big is the problem? Undercharge claims could cost shippers an estimated $200 million, with the upside potential at $27 billion, according to Secretary of Transportation Andrew H. Card Jr. Who is at risk? Any company that sent material via a now-bankrupt motor carrier within the last five years. Furthermore, Derer points out, in some instances even operating carriers are filing claims against shippers that no longer use their services.
The Root of the Problem
The heart of the undercharge claim issue seems to lie in conflicting laws. The Interstate Commerce Act's filed-rate doctrine, enacted in 1930, basically declares that motor carriers can't negotiate rates with shippers but, rather, must charge a rate that they have filed with the ICC. The Motor Carrier Act of 1980, on the other hand, substantially deregulated the trucking industry and allowed carriers to negotiate rates. The problem is, despite the 1980 law, the outdated filed rate doctrine is still on the books.
"In an age of deregulation, the doctrine is form without substance. It serves no legitimate purpose," notes David E. Otero, an attorney with Mahoney Adams & Criser (Jacksonville , Fla.), a law firm that is defending more than 225 shippers involved in P.I.E. cases. Michael Mattia, director of risk management for the Institute of Scrap Recycling Industries (ISRI) (Washington, D.C.), agrees: "The filed rates are window dressing. Few carriers, if any, use them." Still, the law is the law.
Another part of the problem is that the Motor Carrier Act created a distinction between contract carriers and common—or commercial—carriers. Contract carriers are authorized to accept freight only from specific shippers, and they are not required to file their rates with the ICC. Common carriers can accept freight from any shipper, but they must file all rates—including discounted, negotiated rates—with the ICC.
The paradox is that the act allows some carriers to be both. "Because of this," Derer explains, "a trucking company can quote a rate as a contract carrier and then come back later with an undercharge claim based on the fact that the company is a common carrier. This is obviously bait-and-switch at its worst."
Many undercharge claims follow a similar scenario: A motor carrier and a shipper negotiate a rate, and the carrier subsequently fails to either enter into a signed contract or file the discounted rate with the ICC. The carrier later goes bankrupt, and the bankruptcy estate's trustee bills the shipper for the difference between the unfiled, negotiated rate and the carrier's filed rate. This situation may fly in the face of normal contractual relationships, but the filed-rate doctrine says flatly that if the negotiated rate isn't on file with the ICC, then it's not the legal rate for a common carrier.
Navigating the Legal Maze
While the undercharge issue first popped up in the early 1980s, it did not catch fire until 1990, in large part because the ICC provided protection for shippers by asserting that undercharge claims were an unreasonable practice and, therefore, the motor carrier's estate couldn't rightfully demand payment. "The ICC was upholding the idea that a deal is a deal, and you can't go back on it," Otero explains.
In 1990, however, the Supreme Court ruled in Maislin Industries Inc. vs. Primary Steel Inc. that the ICC did not have the authority to disregard the filed-rate doctrine by dismissing undercharge claims as an unreasonable practice. The ICC could only rule whether the filed rate itself was unreasonable. The Supreme Court basically asserted, therefore, that a deal's not a deal when it comes to undercharge claims.
The Maislin decision, coupled with the recent increase in the number of bankrupt carriers, has allowed a flood of undercharge claims to be made against shippers. "In effect, commercial carriers are allowed to lie, cheat, steal, and defraud their customers," Derer asserts. "Call it what you may, the federal government not only arms them with the ability to do this, but also supports such behavior through the federal court system."
Derer's reaction embodies the shock, anger, indignity, and frustration that most scrap recyclers have felt upon receiving undercharge claims. Most feel victimized and describe such claims as "unconscionable," "underhanded," and "unjust." "This raises government interference in the normal conduct of business to a new level," Derer states. "Ironically, this occurs at a time when such disruption can be least tolerated."
Acting as a double-whammy with Maislin, most shippers are prohibited from using the usual legal defenses in disputes between contracting parties because common carriers are regulated by the government. To make matters worse, Card points out that the potentially lucrative nature of undercharges "has even generated a new fear—that of motor carriers being acquired solely in order to put them out of business and collect their potential undercharges."
Fighting Back
Maislin has made it more difficult for shippers to defend themselves against undercharges, but it hasn't completely shut the door. As a first line of defense, shippers can show that the rates the trustee is trying to collect are unreasonable—in other words, although the rate may have been the "official" rate filed with the ICC, no shipper would have agreed to send material under that rate at the time. For example, as part of his defense, Derer has polled a handful of carriers to clearly establish that the generally accepted rate at the time matched the discounted rate offered by P.I.E.
The existence of a contract can also be a helpful defense. "Many shippers may have had contracts, oral or written," Otero says. "They're on better legal footing if they had a written one, but they can still assert the defense if it was oral." Derer points out, however, that "in the trucking industry, it's the exception, not the rule, that you receive a written contract. The normal manner has always been a phone call asking the rate from Point A to Point B, and the transportation availability to make the pickup. We, as a shipper, have relied entirely on the trucking companies, which we had assumed were honest businesses."
In the few instances in which the bankrupt carrier filed a discount rate with the ICC, shippers may still have to prove that the negotiated rate was binding on the carrier, Otero says. Another potential defense requires demonstration that the carrier's loss-of-discount rules—which require payment of freight bills within 60 days to guarantee special rates—are legally enforceable.
The most promising defense for scrap recyclers, however, lies in the decision by the 9th U.S. Circuit Court of Appeals in the case West Coast Truck Lines Inc. vs. Arcata Community Recycling Center Inc. The decision points out that one section of the Interstate Commerce Act—49 U.S.C. 10733—permits motor carriers to "provide transportation of recyclable materials without charge or at a reduced rate." Recyclable materials are defined by the act as "waste products for recycling or reuse in the furtherance of recognized pollution control programs."
Under this court's interpretation, therefore, carriers aren't required to charge only their filed rates and shippers of recyclables can rely on negotiated rates. This case, which Derer calls his "ace in the hole," could have "a lot of power for recyclers," Otero says. "It's a defense available to shippers of recyclables that's not available to any other defendants, so it gives them an additional level of protection."
Another benefit of Arcata is that it removes recycling-related cases from ICC control, thus allowing shippers to use the defenses usually available in disputes between contracting parties.
Some recyclers, however, have opted to avoid the hassle—and expense—of challenging their claims in court, choosing instead to pay a percentage of the original request. "The defendant shipper must either pay in full, negotiate a settlement, or pay heavy legal fees to defend itself in a distant state," said William J. Tucker, president of Tucker Co. (Westville, N.J.), a transportation brokerage firm, speaking before the House Committee on Public Works and Transportation's Subcommittee on Surface Transportation. "Certainly tens of millions of dollars have already been extorted from motor carrier customers in this fashion in the last two years."
If recyclers choose to settle, Otero notes, they should make sure that they are released from all future claims from the trustee. "Just because they've only received a few bills now doesn't mean that's the limit of their exposure," he points out.
One thing that recyclers should not do, however, is disregard the claims they receive. Undercharge claims are often brought in the form of adversary proceedings, which are lawsuits in the bankruptcy court. As such, Otero notes, they can be served upon a defendant through regular mail, which may lead the shipper to overlook the serious legal implications of an adversary proceeding. "The minute they receive the rerated billing, they're basically in a lawsuit," Otero says. "An adversary proceeding is very likely to soon follow the billing." The most prudent course, therefore, is for scrap recyclers to consult an attorney before deciding to settle or challenge the claims in court.
Seeking a Resolution
While Arcata offers hope for recyclers, it doesn't carry the weight of a Supreme Court decision like Maislin and hasn't been tested in other circuit courts, which are divided on the undercharge claims issue. Some assert that trial and bankruptcy courts can decide these cases, while others state that, because the issues are transportation-related, it is more appropriate to submit them to the ICC for review.
Fortunately, there is a growing legislative movement to provide relief for shippers. At the Subcommittee on Surface Transportation hearing, for example, Card argued that "legislation declaring that the behavior in question is an `unreasonable practice' would provide the most appropriate relief for pending cases." Any proposed legislation should be retroactive, he suggested, in order to wipe current claims off the books, and future claims should be prevented through increased deregulation of the trucking industry. This would entail "eliminating the tariff-filing requirement for independently set common carrier rates," Card noted. "In addition, contract carriage agreements would become subject to state commercial law, just like most other business agreements. Thus, whatever a shipper and carrier agree is contract carriage at the time of the contract's negotiation would remain legitimate contract carriage after the transportation had been performed." In other words, a deal would once again be a deal.
Despite this support from the Bush administration, it's unlikely that the undercharge claims problem will be resolved by Congress this year. Why? Because "the Teamsters are solidly behind the bankruptcy trustees in these cases, and most of the Democrats in the House support their position," Otero notes. "The Teamsters hope to recoup unpaid back wages and payments to their health and pension funds from the bankrupt carriers." As a result, the union has lobbied successfully to prevent any relief legislation from being passed.
Many pro-shipper organizations, however—including ReMA and the American Trucking Association—have joined forces through a group called the Coalition for an Undercharge Relief Bill, which is attempting to work out a compromise solution with the Teamsters. "For Congress to do nothing," Tucker says, "would be to condemn our country's businesses, especially the small ones, to ruinous lawyering and pillaging for no good cause at a time when we need all the economic stability, growth, and good sense we can muster. To do this small economic repair will reap great benefits and not cost a single tax dollar."
To help push fledgling legislation along, Otero advises scrap recyclers to contact their congressional representatives. "If this issue gets enough attention, if constituents call Congress and say, `I don't care what the Teamsters say, this isn't fair and we're getting killed here,' then something might get accomplished," he says. In this regard, Derer has personally lobbied his congressman, attended hearings on Capitol Hill, and sent letters about his case to senators and representatives who are sponsoring undercharge-related bills.
Keeping Up Hope
The undercharge claim issue has sent reverberations through the scrap industry and is changing the way business is conducted. Derer, for example, says, "We will no longer do business with any trucking company that's a common carrier because we feel they can't be trusted." In general, scrap companies say they are taking a closer look at their traffic operations to prevent future problems. "Transportation is something that many people often push aside," Derer says, "but this is a different situation. Recyclers have to open their eyes and be aware of what could happen if they're not careful." Until this issue is resolved, many scrap executives say they'll be glancing over their shoulders and watching the mailbox, wondering if they'll be the next recipient of an undercharge claim.
In the meantime, the scrap recycling industry shouldn't lose hope. As Card asserts, "We believe the time to act is now, and we believe that the vast majority of shippers and carriers would agree with us." Echoing these remarks, Derer says, "I'm more confident now than I had been. In the beginning, I felt as if the whole world was against me. I'm not trying to be a Don Quixote, but I see this as a tremendous injustice. We have got to win this thing."
Addressing the Problem
In March, ReMA mailed a 16-page briefing paper to every member, outlining the basics of the undercharge claims problem. In addition to providing a list of more than 174 motor carriers that have gone bankrupt and/or filed undercharge claims, the document reviews legal and administrative decisions on the topic, offers advice on how to deal with transportation brokers, and provides guidelines on drafting contracts with motor carriers. The paper also includes a survey for scrap recyclers to fill out if they have received undercharge claims. As of April, more than 20 companies had responded, accounting for more than $200,000 in undercharges. This survey information "will be used to support our proposal for the need for undercharge relief legislation," says ReMA's Michael Mattia.
For more information on undercharge claims, consult "The Undercharge Claim Threat" in the March/April 1991 issue of Scrap Processing and Recycling. — K.K.
The undercharge claim problem is growing, and scrap recyclers need to know how to protect and defend themselves against this threat.