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Freight factoring companies provide much-needed cash flow and additional services to trucking companies. The trucking company sells its accounts receivable, or invoices, at a discount to the freight factoring company and receives an advance of funds in exchange. The freight factoring company will then begin collecting on these invoices from the trucking company’s customers, or debtors. When a debtor sends funds to a freight factoring company, it is paying for the services rendered by the trucking company. As such, the freight factoring company is obligated to apply the funds it receives to its client’s invoices in accordance with remittance attached to the debtor’s payment. When a debtor files bankruptcy, the bankruptcy trustee seeks to recover as much property as possible for the bankruptcy estate. Thus, it is not uncommon for freight factoring companies to find that funds it received from a debtor may be subject to a preferential claim under Bankruptcy Code section 547 for recovery by the bankruptcy estate. However, there is a judicially created exception from recovery called the mere conduit defense. This Comment explores the origins of that defense, its application in cases involving banks as financial intermediaries and as payees on loans, and advocates that freight factoring companies should be viewed as mere conduits in bankruptcy preference claims.

I’m a Conduit, You’re Glue, Funds Flow Through Me and Stick to You