Corruption, Freight Recessions kills Caledon: Chapter 11 offers road to redemption

Capturing the title “Largest trucking-sector bankruptcy ever,” Celadon abruptly shut down, announcing it was seeking Chapter 11 relief December 9. The bankruptcy meant a huge lump of coal in the stockings of more than 3,000 employees, most of them drivers. Many of these drivers were stranded with their rigs across the U.S., Canada and Mexico and likely jobless for the holidays. Merry Christmas.

Celadon is one of the largest truckload carriers in North America, with some 3,300 trucks and 3,800 employees, including approximately 2,500 truck drivers. According to transportation research company SJ Consulting Group Inc., the Indianapolis-based company earned an estimated $611 million in revenue in 2019.

For many the obvious call was Caledon had succumbed to economic forces resulting from overcapacity and climbing operating costs. This may be true, but the death-knell started tolling when local prosecutors revealed the company’s accounting scandal that they say will cost shareholders upwards to $60 million.

Trucking’s year of living dangerously

Embezzled out of tens of millions of dollars, many agree the scandal was at the very least the final blow, Caledon’s knock-out punch coming after being jabbed by a succession of recessionary business cycles impacting the trucking industry. But analysts argue that it had more to do with company business strategies gone wrong and poor organizational cohesiveness that hampered efficient operations and an environment where corruption of this scale could be sustained for so long.

Nevertheless, 2019 was a very dangerous year for trucking; according to transportation industry data firm Broughton Capital in the first three quarters of 2019, nearly 800 carriers went out of business, more than double the count of trucking failures in 2018.

As reported by CBS, a number of factors may behind it, including escalating insurance costs, uncertainty of fair trade relations with China, as well as declines in the spot market and the industry’s overcapacity situation.

Cassandra Gaines, a transportation attorney and head of Gaines Law Group, told CBS MoneyWatch it has been a "tough year" for the industry: "This isn't the first time this year we've seen a trucking company fail and drivers abandoned. That's been happening a lot in 2019." She noted that Celadon failure is not exactly transparent, noting it's hard to tell how much its bankruptcy had to do with fraud and how much it had to do with the market.

Big players are hitting the skids, noted Donald Broughton, founder of the analytics firm bearing his name. Broughton offered CBS the lowlights: In 2018, noted Broughton, 310 trucking companies with an average fleet size of nine trucks failed, pulling 2,800 trucks off the road. Of the 795 companies pulling the plug in the first three quarters of 2019 those fleets averaged 30 trucks, with nearly 24,000 trucks being parked, Broughton said.

A scandal of scandalous proportions

Accounts across the media tell of Caledon’s sordid but cautionary tale: The Indianapolis Star for example. “Former Chief Operating Officer William Eric Meek, 39, and Chief Financial Officer Bobby Lee Peavler, 40, were arrested … on nine counts each that include conspiracy to commit wire and securities fraud and conspiracy to make false statements to the company's accountants and falsify records.”

Prosecutors allege they embezzled the company by:

  • Inflating invoices of older used trucks that they traded for new ones,
  • Selling trucks to a dealer near the end of a fiscal quarter without disclosing that one of the company's divisions, Quality Companies, had agreed to pay the dealer back after the quarter ended, and
  • Making false and misleading statements to auditors about the transactions.

Among its liabilities, Caledon owes $33 million to the Justice Department stemming from the federal probe into the company’s accounting, and smaller amounts to creditors including TA Dispatch LLC, which bought some of the company’s logistics assets earlier this year, and vendors such as Pilot Travel Centers LLC and Goodyear Tire & Rubber Co.

Not so fast. Bankruptcy NOT a result of trucking recession

Sources contributing to the WSJ coverage attributed Celadon’s failure to the company’s individual problems, finding that the accounting scandal tied to a big bet on the company’s truck-leasing business was the primary killer and not necessarily the impact of the broader slowdown this year in freight demand.

“It is more about Celadon than it is about any current apocalyptic events in the trucking freight market,” said Larry Gross, president of Gross Transportation Consulting. “Having said that, when the tide goes out it exposes the rocks. They came under pressure because of the supply-demand imbalance… and ran out of runway.”

Drivers stuck far from home

Shutdowns like Caledon’s raise concerns over drivers who may be stuck far from home and for shipping customers who may have freight shipments tied up. Some previous trucking failures by smaller companies have left drivers and cargo stranded.

In the wake of the company’s announcement Celadon driver Sam Jaime told the WSJ that company officials told truckers like him hauling loads to finish the delivery, while others were directed to the closest Celadon terminal or to the nearest truck stop. “Celadon is offering a bus ticket home,” he said. “It is on us to see how to get our stuff home.”

Better Chapter 11 – Silver lining analysis

When Caledon announced it was seeking Chapter 11 bankruptcy protection from its creditors it asked its drivers to deliver loads still in transit and hand over the company’s trucks. In some good news coming out of this sad story the Wall Street Journal (WSJ) reported two Celadon subsidiaries – Taylor Express and the Mexican subsidiary, Jaguar Transportation – would continue to operate, but are to be sold off intact in a Section 363 Process.

This method noted the WSJ, allows management, working alongside the creditors to control the auction process and get the highest possible price for the companies. Keeping them intact allows Taylor Express and Jaguar to fetch the highest possible prices.

Industry’s a fat sponge and ready to absorb the displaced

Trucking markets, notes the WSJ, should easily absorb the bankruptcy. Celadon’s business only accounts for a sliver of the roughly $200 billion for-hire truckload market, explained SJ Consulting’s President Satish Jindel in the WSJ’s coverage. Celadon’s customer list included Lowe’s Co s., Philip Morris International Inc., Walmart Inc., Honda Motor Co. and Procter & Gamble Co., according to its bankruptcy court filing.

Although the shutdown is the biggest truckload bankruptcy in memory, Jindel noted, “There are plenty of carriers who can fill up the demand this will create.”