specific and subject to interpretation
of federal common law and applicable
state law that can vary from jurisdiction
to jurisdiction. Given the uncertainty of
a fact-specific analysis and the general
knowledge that may be imputed to a
lender given customary due diligence,
reliance on equitable defenses or bona
fide purchaser status is little comfort for
most lenders. The best means of assuring a constructive trust claim fails (and
everyone agrees “That cash is your cash”)
is to ensure that documentation terms
and business practices are in place that
(i) prohibit express trust relationships or
traditional interline arrangements and (ii)
prevent the company from operating as a
“mere-conduit” for payments, but instead
ensure the company takes on the primary
and exclusive obligation to pay its carriers
from its own funds. TSL
Wade M. Kennedy is a partner in McGuire-Woods LLP and the head of the firm’s
Asset Based Lending Group. He focuses
his practice on representing lead financial
institutions in complex syndicated credits
to asset-based and leveraged borrowers.
He has significant experience documenting
asset-based credit facilities in the context of
sponsor acquisitions, unitranche facilities and
first lien/second lien transactions. In addition,
his practice encompasses representing
national financial institutions in single and
multicurrency credit facilities, cross-border
financings and other leveraged finance and
cash flow transactions.
Kennedy is also an instructor for the
McGuire Woods Banking and Finance
department’s Associate Training Program.
He is a regular presenter at various firm and
client educational programs, including, most
recently, “Current Developments in First
Lien/Second Lien Intercreditor Agreements”
and “Bankruptcy and Restructuring Issues in
Asset Based Credit Facilities and Intercreditor Arrangements”.
Kennedy also provides pro bono representation of various educational and environmental
organizations in formation and financing matters and application for tax-exempt status.
Kennedy is serving as chair of the CFA
Education Foundation Governing Board
1 Matter of Kennedy & Cohen, Inc. 612 F.2d
963 1980; Bankruptcy Code §541(d)
2 Third and the Sixth Circuits have held that
the interline trust doctrine exists as a matter
of federal common law. See Parker Motor
Freight, Inc. v. Fifth Third Bank, 116 F.3d
1137 (6th Cir. 1997); Ann Arbor R.R. Co.
v. Comm. of Interline R.R. (In re: Ann Arbor
R.R. Co.), 623 F.2d 480 (6th Cir. 1980); In
re: Penn Central Trans. Co., 486 F.2d 519
(3d Cir. 1973). The Seventh and Ninth Circuits have rejected the doctrine as a matter
of federal common law, Union Pac. R.R. Co.
v. Moritz (In re Iowa Railroad Co.), 840 F.2d
535, 538 (7th Cir. 1988); In re Consolidated
Freightways, 443 F.3d 1160 (9th Cir. 2006),
however, claims in those jurisdictions have
relied on applicable state law and traditional
common law trust doctrines to find constructive trusts.
3 Transportation Revenue Management v.
Freight Peddlers, Inc. 2000 WL 33399885;
In re Columbia Gas Systems, Inc., 997 F.2d
1039 (3rd Cir. 1993)
4 Transportation Revenue Management v.
Freight Peddlers, Inc. 2000 WL 33399885
5 The term “broker” in the transportation
regulatory context is defined in 49 U.S.C.
( 2) Broker. –
The term “broker” means a person, other
than a motor carrier [emphasis added] or
an employee or agent of a motor carrier, that
as a principal or agent sells, offers for sale,
negotiates for, or holds itself out by solicita-tion, advertisement, or otherwise as selling,
providing, or arranging for, transportation by
motor carrier for compensation.
6 See 49 C.F.R. §371.3
7 See 49 C.F.R. §371.13
8 See 49 C.F.R. §370.1
9 Parker Motor Freight, Inc., 116 F.3d 1137
(6th Cir. 1997), Penn Central Transportation
Co., 486 F.2d 519 (3d Cir. 1973), Trans-
portation Revenue Management v. Freight
Peddlers, Inc. 2000 WL 33399885 p. 6.
10 Penn Central Transportation Co., 486
F.2d 519 (3d Cir. 1973)
11 In Re Muma, 322 B.R. 541, 556-557
(Bankr. D. Del. 2005)
12 See Delta Pride Catfish, Inc. v. Marine
Midland Business Loans, 767 F.Supp. 951
(E.D. Ark. 1991) which found funds not held
in trust where (i) company was not found to
be a statutory “broker”, (ii) did not segregate
funds, (iii) paid the carrier prior to receipt of
payment from shipper or (iv) otherwise bore
the risk that the shipper would fail to pay.
Note this case was based on an agency
claim rather than a claim under federal common law constructive trust theory.
13 XL/Datacomp, Inc. v. Wilson (In re
Omegas Group Inc.), 16 F.3d 1443 (6th Cir.
1994). “The equities of bankruptcy are not
the equities of the common law,” concluding
that property subject to a claim of constructive trust is excluded from the bankruptcy
estate only if such a trust has been imposed
by a court “in a separate proceeding prepetition.” Constructive trusts, “are anathema
to the equities of bankruptcy since they
take from the estate, and thus directly from
competing creditors, not from the offending
14 Delta Pride, 767 F.Supp. at 963
15 Delta Pride, 767 F.Supp. at 963
16 Parker, p. 1141-1142