Freight Masters Systems, a minority-owned logistics firm, has filed for Chapter 11 bankruptcy reorganization largely because
of its relationship with the troubled automaker Chrysler.
The Dec. 13 filing in U.S. District Bankruptcy Court in Indianapolis cites difficulties with Chrysler, which is in bankruptcy itself. Meanwhile, a lawsuit pending in Washington state shows Freight Masters also lost key business from Boeing Co. in recent years.
Privately held Freight Masters had 52 local employees and $86 million in revenue just two years ago. Currently, the firm has 18 employees and hires another 90, such as truckers, on contract, according to its bankruptcy filing.
The company didn’t detail assets or liabilities in the filing.
Founder and CEO Gene McFadden did not return telephone calls.
In court records, Freight Masters states that most of its customers are in the automotive industry. Chrysler is in Chapter 11 bankruptcy reorganization and the automakers’ sales have been hemorrhaging.
“The debtors’ secured lender required them to insure Chrysler’s receivables in order to borrow against them. No third party would do so, and the debtors’ cash availability became significantly strained,” Freight Masters stated in a bankruptcy document.
A legal battle brewing on the other side of the country between Freight Masters and a Washington state trucking firm suggests the company’s financial troubles also stem from the loss of business with Boeing over a year ago.
By 2007, Freight Masters’ Boeing business was worth about $17 million, the Indianapolis company said in court filings.
“After seven years of quality service to Boeing, Freight Masters lost approximately 22 percent of its total business when it lost the Boeing contracts,” Freight Masters said in documents filed with U.S. District Court West District of Washington in Seattle, in July.
Battle with partner firm
Freight Masters disclosed the Boeing business in response to a lawsuit filed against it last April by John Berry, the former CEO of Arlington, Wash., trucking firm Smokey Point Distributing, or SPD. Berry sold the firm over a year ago but retained some of accounts receivables, including those involving Freight Masters.
The West Coast legal battle, waged as Freight Masters fights in federal court here for favorable restructuring terms, could become a further financial burden—or an asset—depending on the outcome.
According to court filings, SPD hauled Boeing freight and Freight Masters made arrangements for the work and billed Boeing.
Berry alleges Freight Masters failed to remit to SPD more than $575,000 it received from Boeing for hauling the aircraft-maker’s freight. Under the arrangement, Freight Masters was allowed to keep 8 percent of the billings while the other 92 percent was to go to SPD, according to Berry’s suit.
He also alleges Freight Masters used its entire accounts receivable from Boeing as collateral for one or more loans from institutional lenders on revolving lines of credit.
In other words, rather than borrow against the 8 percent, it counted SPD’s portion as its share of receivables against which to borrow and it used payments from Boeing “to reduce its line of credit instead of remitting payment to SPD,” the suit says.
Berry also alleges that McFadden last January formed another unit, Freight Masters Automotive Logistics, “to divert business from (Freight Masters Systems) in an attempt to preserve FMS’ revenue stream while at the same time avoiding FMS’ accrued liabilities.”
Given the way in which Freight Masters has structured its finances, Berry alleges, “there is a strong likelihood that it will repeat its financing scheme with other carriers.”
Freight Masters denied Berry’s allegations in a response filed in court last July.
Boeing contract undermined?
The Indianapolis company said its use of Boeing receivables or any of its receivables as collateral for credit “is irrelevant to Freight Masters’ independent obligations” to SPD.
Freight Masters filed a counterclaim alleging that Berry sought to and ultimately succeeded in severing Freight Masters’ business with Boeing.
Freight Masters says in the lawsuit that it was the firm that had the contract with Boeing, starting in 2000, with SPD as a subcontractor.
Berry argues otherwise, saying SPD had the business relationship with Boeing and that the aircraft maker approached SPD about “channeling Boeing freight through Freight Masters to assist Boeing in satisfying its (minority/women-owned business) requirements because Freight Master shares are owned by African-Americans.”
Whatever the case, Freight Masters paints Berry as disgruntled after it rejected his offer to sell Freight Masters his Washington logistics firm in 2007 for $26 million.
Berry then hired a firm to find a buyer for SPD, Freight Masters alleges.
The Boeing work was up for rebidding at about the same time. Freight Masters believed it submitted the low bid and “fully expected to get substantial work from Boeing … and planned accordingly,” the company says in court records without elaborating.
But the work went instead to SPD, right before Berry sold the company for $34 million, according to Freight Masters.
In its counterclaim, Freight Masters alleges SPD used its confidential information to undermine Freight Masters’ relationship with Boeing and land the contract.
It seeks unspecified financial damages from Berry and SPD.
Whatever the loss of Boeing work meant to Freight Masters, the Indianapolis company has, like other logistics firms, been buffeted by the economic downturn.
An estimated 370 trucking firms nationwide filed bankruptcy during the second quarter.
The economic slowdown that hurt truckers has reached across virtually all industries, said Kenny Cragen, president of the Indiana Motor Truck Association.
“Most of the haulers are saying the freight is coming back, but the rates are so low.”
Freight Masters, besides operating a trucking unit, also offers higher-value logistics services, which served it well for years.
McFadden won national recognition six years ago for improving the way vehicles are shipped from manufacturing plants in Mexico to U.S. ports and auto dealerships. His firm won favor from automakers including Chrysler for cutting nearly a week from vehicle delivery times.
McFadden’s company was credited for innovative ideas such as brokering loads on already-planned shipments that had extra space, and finding non-stop transportation for vehicles, which reduced damage and vandalism during transit.•