Industry Issues: Should the load broker trust fund requirement be retained?

by David Bradley

Economic deregulation in Ontario is now complete.

On Jan. 1, 2006, Ontario’s Truck Transportation Act was repealed. As part of this, the Load Broker requirements contained in Ont. Reg. 556/92, in effect for more than a decade and which attempted to regulate the activities of load brokers (by requiring load brokers to register with the Ministry of Transportation, to obtain and maintain a surety bond, and to hold in trust the funds that a load broker owed to carriers for freight charges) were also repealed.

While the load broker regulations were well-intended, they were in the opinion of most carriers largely ineffective – in no small part due to MTO’s apparent lack of interest in enforcement.

However, one vestige of the load broker regulations survived (although it is now found in the Highway Traffic Act), namely the trust fund requirement.

While the industry does not mourn the loss of the old regulation as a whole, the trust fund requirement has been and remains an important tool for carriers in their quest to collect freight charges.

This is particularly so in light of the 2005 Ontario Court of Appeal decision in the case of GMAC Commercial Credit Corporation-Canada vs TCT Logistics Inc.

The events culminating in the appeals court decision were based on the activities of now defunct TCT Logistics Inc. and its related companies, who were in the business of warehousing, truck transportation and load brokerage. When the company failed, an interim receiver was appointed Jan. 24, 2002 and the company was ordered into bankruptcy shortly thereafter.

The dispute upon which this case revolved was between the secured creditor, GMAC, and the carriers who had been contracted by TCT Logistics to transport loads.

In violation of the requirements of the Ontario load broker regulation, TCT did not maintain a separate trust account for the monies it received from its customers for the portion of its invoices that related to carrier charges.

The central issue in the case was whether, despite that non-compliance, those funds were trust funds within the meaning of the federal Bankruptcy & Insolvency Act.

If they were trust funds, they would go to the carriers and if not, then they were the property of the bankrupt company and available for distribution to the secured creditors, namely GMAC.

The Court of Appeal decision was, on the whole, a victory for carriers.

The court ruled that in the case of a receivership and bankruptcy, the then TTA regulation did in fact apply to the collection activities of interim receivers.

The court said that upon receipt of the carrier’s fees from TCT customers, the trust obligation imposed by the regulation applied to the interim receiver and the receiver was required to comply with the regulation and set the carrier’s portion of the receivables collected aside in trust.

In so ruling, the court in effect validated the regulation and the obligations imposed on load brokers.

There is no reason to believe that the current regulation would not result in the same conclusion.

Although the court ruled that because TCT co-mingled its receivables it did not meet the test of a trust for the purposes of the Bankruptcy & Insolvency Act, it did order the trustee in bankruptcy to pay to the carriers their portion of the receivables collected by the receiver for services rendered prior to Jan. 24, 2002.

It is reported that including interest, this is now in excess of $3 million.

How this will be calculated and allocated is under discussion and will likely be decided at a further hearing.

What is crucial is that this decision means that Ontario’s highest court has confirmed that load brokers indeed have a trust obligation under the regulation.

When it comes to the collection of freight charges, such a requirement is a valuable tool for carriers.

In addition, in another 2004 Ontario court ruling in the Sager Transport Limited v. Varga Trucking Ltd. case, the Superior Court of Ontario ruled that the existence of the trust requirement was instrumental in allowing an Ontario carrier to collect charges directly and personally from the officers and directors of a load broker corporation (even where they had closed up their business) where the officers and directors failed to ensure that carrier funds were held in trust as required by the regulation.

Some might suggest that the trust fund requirement is not necessary, given that under current law a carrier already has a lien against the goods for its freight charges, or that carriers are unfairly permitted a right not available to others.

However, while the lien is in theory available, exercising the lien (allowing the carrier to demand payment of the freight charges each time a shipment is carried, and before it is delivered) on any sort of regular basis would throw the relentless wheels of commerce into disarray, hurting not only the carrier and its customers, but causing damage to the load broker/shipper relationship as well.

Furthermore, it is not an unusual provision of many of our statutes to provide for trust funds and other related requirements – in many instances to the benefit of not only individuals but companies as well – so to suggest that somehow the trucking industry has an advantage not available to others would be incorrect.

In view of the nature of the transportation business, particularly the risks associated with the outlay of large amounts of capital equipment and time – based in many cases simply on a phone call – retaining the trust fund requirement provides a reasonable balance.

Perhaps in situations where carriers move loads at the behest of someone other than the owner of the goods they should be seeking the right to ultimately collect the payment of their freight charges directly from the owners of the goods, but that is an argument for another day.

– David Bradley is president of the Ontario Trucking Association and chief executive officer of the Canadian Trucking Alliance.

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