Overview
Last week the Supreme Court issued a unanimous decision in Montgomery v. Caribe Transport II, LLC, resolving a question that had divided courts across the country: whether federal law shields freight brokers from negligence claims arising out of their selection of carriers. The Court held that it does not.
The decision matters to banks because it settles, on a nationwide basis, that freight brokers and third-party logistics companies face civil liability for the carriers they retain on interstate shipments. That liability does not appear on a borrower’s balance sheet — it materializes when a lawsuit is filed. For financial institutions with transportation sector portfolios, the time to assess that exposure is now, before it surfaces in a credit review or regulatory examination.
What the Decision Holds
The case arose when a freight broker retained a carrier with a documented history of safety violations. After one of the carrier’s drivers caused a serious accident, the injured plaintiff sued the broker for negligent selection. The broker argued that the Federal Aviation Administration Authorization Act preempted the claim. The Court disagreed, holding that the statute’s preemption clause does not extend to common-law negligence claims against brokers.
The practical effect is straightforward: brokers and logistics companies that choose unsafe carriers can now be sued for that choice in any federal court in the country. Writing separately, Justice Kavanaugh observed that the resulting litigation and insurance costs “will cascade through the economy.”
What This Means for Your Institution
Transportation sector borrowers — particularly freight brokers, third-party logistics providers, and freight forwarders — now carry a category of contingent liability that did not exist with clarity before last week. Existing loan agreements, covenant packages, and insurance requirements may not adequately account for it.
How We Can Help
We can assist your financial institution to mitigate these risks by:
- Reviewing existing loan documentation to assess whether material adverse change definitions, financial reporting covenants, and insurance requirements are adequate in light of this decision;
- Advising on updated underwriting criteria for new transportation sector credits, particularly for brokers and logistics companies with significant interstate operations;
- Preparing your institution for regulatory examination by ensuring that policies and procedures reflect an awareness of emerging risk in your transportation portfolio; and
- Counseling on disclosure requests and covenant modifications for borrowers whose exposure may have materially changed.
Next Steps
For questions about your institution’s transportation sector exposure or loan documentation, please reach out to the authors of this alert or your contact in our Financial Institutions Group.
