Has the Disastrous Economic Cycle in the Transportation Sector Reached its Bottom?

Written by: David Jencks, Esq., Jencks Law, P.C.

The Last 18 Months

The transportation sector has been in shambles since the third quarter of 2022.  Truckload capacity has remained high, freight rates have decreased approximately 30% over an 18-month period, and freight volume has steadily declined since May of 2022 through September of 2023, spelling a triple whammy for the sector.  In addition, an unprecedented number of freight broker bankruptcies occurred in 2023. The increase in broker insolvencies continues to have a multi-faceted impact on motor carriers and their Factors. 

By the first quarter of 2023, experts forecasted an elongated “U” shaped transportation economic recovery rather than a “V” shaped one and that has certainly proven to be true.

Today

Is the transportation sector finally turning upward? There are modest glimmers of hope in February of 2024.

Freight have bounced a bit off the September 2023 lows and are inching up.  Massive over capacity of trucks in the system has been purged, and while over capacity remains, there are less available trucks in the system. Freight volume has improved since the April 2023 lows and remains relatively steady at moderate levels. 

Perhaps the most telling sign that the economic lows are in, and the recovery has begun, is that there have been no notable broker bankruptcies or closures in five months. 

Broker Bankruptcies

While things may finally be looking up a bit in transportation, the calamitous 18-month downturn within the sector leaves Carriers and Factors still picking up the mess. 

Yellow

Yellow filed for Chapter 11 bankruptcy protection in August of 2023, blaming a labor dispute with the Teamsters union for its ultimate failure. In its filing, Yellow estimated total assets of $2.15 billion and total debt of $2.59 billion.

In mid-January, a U.S. bankruptcy judge approved Yellow's $82.9 million sale of 23 leased shipping centers to six other trucking companies, one month after many of the company's real estate assets sold for $1.88 billion.  The Bankruptcy Court approved the sale in a written order on January 14, 2024, after Yellow filed court papers indicating that no one had raised any objections to the sale.

Yellow chose to break up its business rather than keeping the company intact for potential buyers. With most of its real estate assets sold, the company is focused on the sale of its vehicle fleet.

Recently, claim buyers have been very active in the bankruptcy offering to purchase Carrier and Factor claims for 50% of the face amount.  This is in direct response to the better-than-expected sale prices for Yellow assets.  It may behoove Factors to consider in earnest selling their claims.  However, Factors should consult with counsel regarding the effect of any proposed claims sale and assignment.

Further, there is some belief that despite Yellow being liquidated, there may be funds available for unsecured creditors.  It’s simply too early to tell, but your author remains dubious of anything more than a de minimis payout to Carriers and Factors.

Convoy

In October of 2023, Convoy abruptly ceased operations.  Convoy CEO Dan Lewis cited in a memo to employees an unprecedented freight market collapse and dramatic monetary tightening as the cause for the business implosion. Lewis hinted that Convoy had intended to be acquired, but the combination of the freight markets was crushing a potential strategic acquirer, and the combination became a perfect storm. 

The lack of an organized insolvency action has led to the parting off of assets and a secured creditor claiming it has foreclosed on the assets of Convoy, including the accounts receivable. This business closure, lacking an organized insolvency action, will likely lead to piecemeal interpleader actions brought by Shippers facing competing claims to payment for transportation services. Factors will be, and already are, being forced to appear in these actions to assert their case and priority to payment over the interplead funds. 

Surge

Surge Transportation filed chapter 11 bankruptcy in July of 2023 initially claiming to owe approximately 12 million dollars to over 5,000 trucking companies. Ongoing attempts are being made for Surge to effectively re-organize and continue as a going concern on a post-petition basis.

There remains a significant issue over ownership of Surge’s pre-petition accounts receivable as Factors and collections firms have taken the position that most of the pre-petition collections that remain unpaid are not the property of the bankruptcy estate, Surge or its secured lender, but rather belong to the unpaid pre-petition Carriers and their assignee Factors. This issue remains under litigation. 

Transplus

Transplus Freight System Inc., filed for Chapter 7 bankruptcy liquidation in June of 2023 claiming assets of up to $50,000 and liabilities between $1 million and $10 million. Transplus announced no funds will be available for unsecured creditors, which unfortunately debts to Carriers (and thus their Factors) are all too often characterized.  

Meadow Lark

In October, 2023, Meadow Lark Agency and its affiliate, Meadow Lark Transport, filed for Chapter 7 protection in the U.S. Bankruptcy Court for the District of Montana.

In its petition, the Meadow Lark entities listed assets of between $10 million and $50 million and liabilities of between $1 million and $10 million. The petition states it has up to 5,000 creditors and that no funds will be available to unsecured creditors.  Once again, this bankruptcy leaves only a small chance of minimal recovery for Carriers and Factors. Because the Meadow Lark insolvency is a liquidation rather than reorganization, both Carriers and Factors face limited remedies and maneuverability within the bankruptcy action to collect. Complicating Carrier and Factor recovery efforts is approximately 120 ex-employees claiming unpaid wages of $800,000 that will likely take any payment precedence over the 1,300 trucking companies that are owed almost $2.7 million.

Bankruptcy Takeaways

The number of broker bankruptcies, combined with the issues raised in Surge and Convoy in particular, are likely to generate long term ripples in terms of credit and risk management, collection issues in seeking payment from third parties for Carrier’s services, business (and legal) issues surrounding the role and responsibilities of secured parties when financing brokers, and the long debated penultimate multi-part legal issue of a) must the carrier actually always be paid, b) by whom, and c) when two or more parties claim the right to ownership of freight invoices, whose money is it? 

What’s Ahead In 2024

A fair summary of transportation industry forecasters shows a consensus call for a 7% to 10% year over year rise in freight rates, continued leveling of truck capacity, and steady freight volume in 2024.  

2024 is likely to bring a respite from credit defaults, carrier failures, and chronically low freight rates.  However, the relatively modest improvements will likely have Carriers and their Factors still looking for halcyon days. 

About David Jencks, Esq.

David Jencks represents banks, factors, asset-based lenders and finance companies in commercial transactions and commercial litigation in state and federal courts nationwide with a particular focus on transportation factoring. He represents Factors, Brokers and Motor Carriers in transactional and litigation matters. He is a member of the Transportation Lawyers Association and Delta Nu Alpha, the professional fraternity involved in the continuing education of transportation professionals. David earned a Bachelor of Arts Degree at the University of South Dakota and he holds a Juris Doctorate from Hamline University.