Mark Pestronk
Mark Pestronk

Q: I am an independent contractor (IC) of a midsize agency that hosts several other ICs. One of the host's policies is that all checks collected must be made out to the host (and not to ICs), or if they are accidentally made payable to an IC, the IC must endorse the check to the host. When my client's money is sitting in the host's bank account for weeks or months until the host pays the supplier, I worry about it. Is that money protected in any way against the host's insolvency or bankruptcy? Would the supplier have to honor the booking even if the host doesn't pay the supplier? If not, do you have any suggestions to alleviate my worry?

A: With limited exceptions, money held by your host is not protected in the event of the host's insolvency or bankruptcy. In other words, if the host spends all the money before the supplier is paid, the money is gone.

In a bankruptcy proceeding, your clients may get little or nothing by way of refunds. The bankrupt company must give priority to consumer deposits of up to $2,850 per person, but that does not necessarily mean that your clients will get that much. After higher-priority creditors such as employees are paid, there may not be anything left over for consumers.

The limited exceptions relate to agencies in California, Hawaii and Washington state. There, the Seller of Travel laws require the registered seller (i.e., your host) to maintain client funds in a trust account, and the concept is that trust funds are not part of the bankruptcy, so they are left intact.

However, there is no one to stop the host from never depositing the funds in the trust account or from withdrawing them without paying the supplier.

Further, in California and Washington, an agency can substitute a surety bond for the trust account, but the client's refund would come from the bonding company long after the trip was supposed to take place.

Finally, California has a Travel Consumer Restitution Fund to help clients whose agencies are insolvent, but if your host isn't headquartered in that state or publicly traded, and if your client doesn't live there, the fund cannot help.

So, in the vast majority of cases, if your host spends the client's money and then goes bankrupt, your client is out of luck, as the supplier will not honor the booking. The client will undoubtedly look to you for satisfaction, even though you aren't liable for the host's default.

One solution is for the host to allow you to hold the funds, but smart hosts would probably not agree to that change, as the risk of IC embezzlement or default is too great.

The ideal solution is to require your clients to pay by credit card, as the Fair Credit Billing Act requires the card companies to provide refunds for services not provided. Some sharp hosts require all IC-related payments to be made by credit card, and that's probably what you should require, too.

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