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Bankruptcy Laws in Logistics
How to Protect
Your Company
Customs brokers and sureties have long suffered losses from importers who file for bankruptcy. Customs brokers are seeking a technical change in bankruptcy
laws to provide relief for themselves and surety companies who have paid duties and fees to U.S. Customs & Border Protection (CBP)
on behalf of their clients. To truly understand the meaning
of these requested changes, it is important to understand
the existing bankruptcy laws.
Types of Bankruptcy
Chapter 7 bankruptcy is commonly referred to as “Liquidation” bankruptcy. In Chapter 7, a trustee is appointed to gather the debtor’s
property, liquidate assets and pay a dividend to unsecured creditors. A company filing Chapter 7 completely closes their business, meaning importers will
close without payment to a majority of its creditors, including Customs brokers and their surety. The importer is no longer importing so a Customs bond is
not required.
Chapter 11 bankruptcy is frequently referred to as “Reorganization” bankruptcy. In this type of bankruptcy, a trustee is also appointed to manage
the bankruptcy, and the company continues to operate while reorganizing its finances. The importer still needs a Customs bond to continue its importing business,
which provides the customs broker and surety with more leverage to demand immediate payment of duties, taxes and fees, as well as collateral to continue the bond.
Bankruptcy cases increased to a record high for the fiscal year ending September 30, 2001, with most being Chapter 7 filings. Because bonds guarantee financial
performance, sureties saw an increased number of bond claims as more companies filed for bankruptcy and defaulted on duty obligations. In 2006, bankruptcy
filings fell 9.3 percent during the 12-month period ending June 30, 2006. Bankruptcy cases filed in federal courts during that period totaled 1.4 million,
down from the 1.6 million bankruptcy cases filed for the 12-month period ending June 30, 2005. This is the lowest filings have fallen since the 12-month period
ending September 2001.1
How Bankruptcy Effects Customs Brokers
Customs brokers benefit the importer, CBP and the federal government by facilitating the collection of duties in a prompt manner. (In addition to taking on
the credit risk, this allows customs to collect monies from a relatively small number of licensed brokers rather than from thousands of individual importers.)
CBP has “priority status,” which means they are considered a priority unsecured creditor under the bankruptcy law whenever payment of duties is in
question. It is more likely that CBP will receive full payment from the bankrupt importer than a customs broker or surety due to this preferential status in
bankruptcy cases. Customs rarely executes the priority standing since the estimated duty is secured under the bond and CBP collects directly from the surety
and/or the broker if the funds were advanced for the importer. CBP has tried to assign its priority status under the bankruptcy code to brokers and sureties,
knowing the benefits of collecting from brokers and sureties rather than directly from numerous importers. Bankruptcy courts held, however, that CBP does not
have the authority to assign its priority through a regulation.
H.R. 1294, the Customs Business Fairness Act of 2005, is a stand alone bill introduced by Rep. Henry Brown (R-SC). The bill would give priority consideration
to bankruptcy claims from customs brokers and sureties who have paid duties to Customs on behalf of importers who have subsequently filed for bankruptcy. The
bill was referred to the House Judiciary Committee, and has seen no action yet. (2) To check the updated status of this bill visit
http://www.govtrack.us/congress/bill.xpd?bill=h109-1294.
Protect Yourself
As a customs broker, there are many ways you can protect yourself from the dangers of a company filing for bankruptcy:
- Require financials before extending credit to importers. These give an indication of the financial strength of the company and its ability to pay
duties, taxes, fees, freight, invoice charges, etc.
- Rely on banks and sureties for support. Bank reference checks should be conducted by contacting the Commercial Department to request details on
their line of credit, checking accounts, etc.
- Request collateral from any importer with poor financial statements and/or credit ratings.
- Through interaction with clients you can often identify early signs of financial troubles.
For further information, please contact your local Avalon office or Kim Beiswanger, Product Manager at Avalon’s corporate headquarters. Kim can be
reached at her direct line: 847-700-8076 or via e-mail at kbeiswanger@avalonrisk.com. To view a directory of Avalon’s office locations, please visit our
Web site at
www.avalonrisk.com.
Sources:
- Total Bankruptcy Cases Filed Fall to Lowest in Nearly Five Years,
http://www.uscourts.gov/Press_Releases/
bankruptcyfilings082806.html
- Bankruptcy Protection for Brokers,
http://www.conect.org/4%20bankruptcy.pos.pdf#search=%22customs%20house%20brokers%20and%20bankruptcy%22
- The Customs Business Fairness Act,
http://www.ncbfaa.org/2005gac/papers/bankruptcy.htm
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