Overview
Reprinted with permission from Law360.
On May 14, the U.S. Supreme Court handed down a unanimous decision in the case of Montgomery v. Caribe Transport II LLC that resolved a long-running circuit split over whether federal law shields freight brokers from state negligence claims. The court held that it does not.
For the transportation and logistics industry, the ruling was frontpage news, but the banking industry seemed to miss it, even though banks face a materially different credit environment when it comes to lending to freight brokers, third-party logistics providers and freight forwarders.
The new credit environment is a function of liability exposure that the Montgomery ruling creates in the freight and logistics space throughout the country, exposure that does not appear on any borrower's balance sheet today. But that decision will no doubt create higher litigation costs, higher insurance premiums, tighter operating margins and, in some cases, adverse judgments.
Banks that do not account for it proactively will find it surfacing instead at precisely the wrong time: during a credit review, a covenant trigger or a regulatory examination.
The Court's Ruling
The Montgomery facts are common for a trucking negligence case.
A broker, C.H. Robinson Worldwide Inc., coordinated a freight shipment using a carrier — Caribe Transport II — that carried a conditional safety rating from the Federal Motor Carrier Safety Administration. The rating conveyed documented deficiencies in driver qualification, hours-of service compliance, vehicle maintenance and crash history. A Caribe driver carrying freight coordinated by C.H. Robinson struck another vehicle on an Illinois highway, and the injured plaintiff, Shawn Montgomery, lost his leg.
Montgomery sued C.H. Robinson, alleging that the broker was negligent in selecting a carrier it knew — or should have known — posed an unreasonable risk. C.H. Robinson's defense was a preemption argument: The Federal Aviation Administration Authorization Act, or FAAAA, preempts state laws "related to a price, route, or service" of motor carriers and brokers, which it argued included state law tort claims.
The U.S. Court of Appeals for the Seventh Circuit agreed, relying on its own precedent. So did the U.S. Court of Appeals for the Eleventh Circuit in a parallel line of cases.
The Supreme Court reversed. Writing for a unanimous court, Justice Amy Coney Barrett held that the FAAAA's safety exception — which preserves state authority "with respect to motor vehicles" — saves negligent hiring claims against brokers from preemption. The court's reasoning was textual: Requiring a broker to exercise reasonable care in selecting a carrier concerns a motor vehicle safety matter that is not preempted by the FAAAA.
The Kavanaugh Concurrence and the Banking Industry
Justice Brett Kavanaugh, joined by Justice Samuel Alito, concurred separately and at some length. His concurrence is worth reading carefully by anyone in financial services, because it contains the most explicit acknowledgment in the opinion of the decision's economic downstream effects.
Justice Kavanaugh acknowledged the weight of the brokers' concerns — that state tort liability is unpredictable, that litigation costs are real even when defendants prevail, and that the costs of more rigorous carrier vetting "will cascade through the economy and be paid in part by American consumers in the form of higher prices."
He nonetheless joined the majority because he could not conclude that Congress, through language aimed at economic deregulation, had silently immunized upstream brokers from safety-related tort liability while leaving trucking companies fully exposed.
How This Affects Transportation Sector Lending
The affected borrower universe is broader than it may first appear.
Freight brokerage is not a niche industry. According to data from the Federal Motor Carrier Safety Administration, which was referenced in the Supreme Court's opinion, approximately 28,000 licensed brokers arrange transportation for roughly a third of all freight shipped by motor carriers in the U.S.
Many of these businesses — particularly smaller regional brokers and asset-light third-party logistics providers — operate on thin margins in a freight market that has been under sustained rate pressure since 2022. The decision lands in an industry that is already financially stressed.
For lenders, the material risks break into three categories.
Contingent Liability Exposure
Negligent hiring claims against brokers were, until this decision, preempted in the Seventh and Eleventh Circuits and unresolved elsewhere. Borrowers litigating in those jurisdictions carried less liability exposure for carrier selection decisions. That protection is now gone, nationwide.
The resulting contingent liabilities do not appear in any borrower's current financial statements. They materialize when lawsuits are filed — often years after the underlying accident and long after a credit relationship has been established. Financial institutions that underwrote broker credits against the backdrop of at least partial FAAAA preemption may be holding exposure they did not model.
Insurance and Compliance Cost Inflation
Insurance premiums for freight brokers will likely increase. Carriers and underwriters that previously assumed FAAAA preemption would limit broker exposure may reprice accordingly. Brokers may also face pressure — from their own counsel, from shippers and eventually from a market that prices for safety outcomes — to invest in more rigorous carrier vetting systems, including credentialing checks, safety score monitoring and documentation protocols.
These are real operating costs. In a business where margins are already compressed, they are also credit-relevant.
Covenant and Documentation Gaps
Most loan agreements with transportation sector borrowers were likely not drafted with broker negligence liability in mind, because that liability was uncertain or preempted in many jurisdictions.
Material adverse change definitions may not capture the emergence of an expanded category of tort exposure. Financial reporting covenants may not require disclosure of litigation reserves or pending claims. Insurance covenants may specify coverage types and minimum limits that are adequate for property and auto liability, but silent on the professional liability and errors-and-omissions coverage that broker negligence claims
implicate.
These are documentation problems that will surface in examinations.
What Banks Should Be Doing Now
The immediate priority is portfolio identification. Not every transportation sector borrower carries the same risk profile under the Montgomery ruling.
The decision applies to interstate brokerage; a borrower whose operations are exclusively intrastate is governed by a different provision of the FAAAA and is not directly affected. The practical task for lenders is to segment the portfolio: Which borrowers are engaged in interstate freight brokerage or third-party logistics with meaningful interstate exposure, and which are not?
For the affected credits, the next step is a covenant and documentation review.
The questions worth asking are specific:
- Does the material adverse condition definition in each credit agreement capture the emergence of new or expanded categories of litigation exposure or regulatory risk?
- Do financial reporting covenants require the borrower to disclose pending or threatened litigation above a specified threshold?
- Does the insurance covenant require professional liability or general liability coverage adequate to the new risk environment, and does it require that the bank be named as an additional insured or loss payee on relevant policies?
If the answers are uncertain, the documentation needs attention.
Annual reviews for broker-borrowers should now include a standard set of disclosures: pending or threatened litigation, current insurance coverage and limits, and any operational changes the borrower has made in response to the decision. The last item is particularly telling — a borrower that is unaware of the Montgomery ruling, or that has taken no steps to assess its exposure, presents a different risk profile than one that has already updated its carrier vetting procedures and taken other responsive steps.
Underwriting criteria for new credits need to be updated prospectively. Carrier vetting practices — specifically, whether the borrower has a documented process for reviewing Federal Motor Carrier Safety Administration safety ratings, crash history and compliance records before engaging a carrier — are now a legitimate underwriting factor. So is the adequacy of the borrower's liability insurance. These are not metrics that most bank underwriting checklists currently capture for broker credits.
Finally, institutions should assess regulatory examination readiness. Bank examiners in the transportation lending space will be aware of the Montgomery ruling. Institutions that cannot demonstrate, through policies, procedures and loan file documentation, that they have identified and assessed the decision's impact on their portfolios will be at a disadvantage. The time to build that documentation is before the examination, not during it.
A Note on Proportionality
None of this means that freight brokerage as a lending category has become untenable. Justice Kavanaugh seemed at pains in his concurrence to note that brokers who exercise reasonable care in carrier selection — who check safety ratings, ask hard questions and document their vetting — should be able to defend against negligent-hiring claims successfully.
The credit implication, then, is not that broker-borrowers are suddenly unacceptable risks. It is that the risk profile of broker-borrowers has changed in ways that existing loan documentation, underwriting criteria and covenant packages may not reflect. The banks that recognize and address that gap promptly are in a better position than those that do not — both in terms of credit quality and in terms of regulatory posture.
Montgomery v. Caribe Transport II is a tort case that will be litigated in state courts and federal district courts for years, but its effects on the financial institutions that fund the freight brokerage industry are immediate. The decision arrived without the fanfare that typically accompanies a Supreme Court ruling with broad economic implications. The banking industry should not let that quiet arrival translate into a delayed response.
The risks that Montgomery creates for lenders are simultaneously a credit problem, a documentation problem and a litigation exposure problem. Institutions that address all three dimensions — rather than treating them in isolation — will be better positioned to protect their portfolios and satisfy examiners.
About the Lawyers
Stanley F. Orszula is a partner in Barack Ferrazzano's Financial Institutions Group. Clients rely on Stan for strategic counsel on Banking-as-a-Service (BaaS), fintech partnerships, digital assets, bank regulatory and compliance matters, and distressed loans and assets. Drawing on his prior experience as counsel at the FDIC, Stan advises banks through every stage of their BaaS programs: from initial board strategy through partner identification, due diligence, contract negotiation, regulatory approval, and exit planning. He has helped banks across the country launch credit, debit and prepaid cards, payment processing, real-time payments, commercial and consumer loans, and investment products.
Steven J. Yatvin is a partner in Barack Ferrazzano's Litigation Group. With over 25 years of practice, Steve approaches disputes as a business counselor first, resolving matters favorably when possible and applying his first-chair trial experience when a case must go to trial. Clients rely on him to bring creative solutions that avoid disputes, to counsel them clearly on the risks and benefits of litigation when a dispute is unavoidable, and to maintain the relationships with opposing counsel that keep a deal within reach. Much of Steve's work is in the auto industry, where he represents manufacturers in dealer disputes and advises them on a range of dealer network initiatives.
