Freight Masters files bankruptcy after losing business from Chrysler, Boeing

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.

McFadden

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.

Industry pressures

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.•

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