Recently, in Owner Operator Indep. Drivers Ass’n, Inc. v. Comerica Bank (In re Arctic Express, Inc.), No. 09-3463, 2011 WL 722211 (6th Cir. March 3, 2011), the Sixth Circuit addressed the impact of the Truth-in-Leasing regulations of the Motor Carrier Act on the maintenance escrow funds held by a debtor in favor of the debtor’s beneficiary-lessees.  Ultimately, the Court concluded that these regulations impressed a statutory trust upon the maintenance escrow fund in favor of the debtor’s beneficiary-lessees.  Because of this trust, a lender secured by the debtor’s cash collateral account, which included the trust funds, would not be considered a bona fide purchase for value of the trust funds and thus would not have priority in the trust funds over that of the beneficiary-lessees.  The lender was required to disgorge payments made to it out of the trust funds.

The matter began when the Plaintiffs, representatives of a certified class of owner-operator truck drivers, filed suit against a regulated motor carrier, Arctic Express Inc. (“Arctic”) for maintenance escrow funds owed to the owner-operators.  These owner-operators independently owned, leased and operated motor carrier equipment and each had entered into two agreements with Arctic and D&A Associates Ltd. (“D & A”)—a non-carrier company that leases truck units to independent owner-operators.  Under these two agreements—an independent contractor agreement and a lease agreement—the owner-operators provide hauling services to Arctic by using tractor-trailers leased from D & A. 

Under the agreements, the owner-operators were to be compensated for their services by receiving a percentage of the amounts received by Arctic from its customers for the transportation of freight that the owner-operators were performing.  In addition to their transportation services, the owner-operators were required to make weekly rental payments for the equipment they were leasing to D & A.  And, under each lease, Arctic was to deduct a flat fee of nine cents per mile from the compensation of the owner-operator for the purpose of repairing and maintaining the leased equipment.  These maintenance payments were kept by Arctic in a maintenance escrow fund and formed the basis of the resulting litigation.

In June 1997, the owner-operators initiated a class action suit against Arctic and D & A, alleging a violation of the Truth-in-Leasing regulations of the Motor Carrier Act, 49 U.S.C. §§ 14101-02, 14704; 49 C.F.R. § 376 et seq.  The District Court agreed with the Plaintiffs and granted partial summary judgment to them on the issue of liability finding that the escrow funds were subject to the requirements of the Truth-in-Leasing regulations and that Arctic was required to return the net unused balance in the escrow accounts to plaintiffs. 

Arctic and D & A subsequently filed a voluntary petition for bankruptcy, and in May 2004 the Plaintiffs entered into a $5.5 million settlement agreement with Arctic and D & A, which was approved by the district court. 

It was during the bankruptcy proceedings that Plaintiffs claim they first learned of Arctic’s financing arrangement with the “Bank”.  Under this arrangement, Arctic had a revolving line of credit where the amount that Arctic could request was tied to several variables, including the amount of eligible collateral.  Arctic also had three accounts with the Bank:  1) a depository/operating account, 2) a zero-balance checking account, and 3) a cash collateral account.  Essentially, when Arctic completed a shipment for a client it would generate an invoice and present it to the Bank.  For most invoices, the Bank would advance a percentage of the invoiced amount to Arctic through its line of credit and Arctic would request that those funds be deposited into its depository/operating account.  When payments of customers were collected, they went directly into the cash collateral account, over which the Bank had control.  The Bank would daily monitor the cash collateral account and apply the balance to the loan, thereby increasing the availability of Arctic to draw on the line.  Arctic would automatically transfer money from its depository-operating account to its zero-balance account to cover checks it wrote and, generally, Arctic exercised complete control over both of these accounts. 

Plaintiffs ultimately filed suit against the Bank, seeking restitution of the maintenance escrow funds deposited by Arctic into the Bank’s accounts and purportedly used by the Bank to pay down Arctic’s indebtedness.  Plaintiffs argued that the funds held in escrow under 49 C.F.R. § 376.12(k) were subject to a statutory trust for Plaintiff’s benefit, which they could pursue against the Bank. 

The Court first addressed whether 9 C.F.R. § 376.12(k) created a statutory trust over the maintenance escrow funds for the Plaintiff’s benefit.  The Bank argued that neither Arctic’s lease agreements nor the escrow provisions of the Truth-in-Leasing regulations refer to a “trust,” and that the Court should read into the regulatory scheme something that Congress could easily have included.  The Sixth Circuit found, however, that an express designation of “trust” was not required, and, drawing comparisons with similar statutes that had been interpreted to create trusts, found that by the Truth-in-Leasing regulations, “through its comprehensive delineation of responsibilities, imposes strict fiduciary obligations on motor carriers, such that it places the motor carriers in a position of trust vis-a-vis owner-operators with regard to the handling of escrow funds.”  This interpretation was supported by the Court’s view of the history of the Truth-in-Leasing regulations, which it found were created to protect-owner-operators. 

The Court was not persuaded by the Bank’s argument that by allowing the commingling of funds and requiring the payment of interest on the escrow funds, 9 C.F.R. § 376.12(k) created a debt, but not a trust.  Given the history of the regulations, these factors were not determinative to the Court and did not contradict the intent to create a trust. 

Having found that a trust was created, the Court then had to address the timing of the attachment.  The District Court had agreed with Plaintiffs that a trust was created, but found that the trust did not attach to Plaintiffs' percentage interest in Arctic's accounts receivable deposited in the cash collateral account; rather, the trust attached to funds in the depository/operating account at the time that Arctic paid owner-operators their compensation net the maintenance escrow deduction.  To the District Court, because nothing but commercially reasonable interest and fees were transferred to the Bank from the depository/operating account, Arctic did not breach its fiduciary duties to the Plaintiffs (which would have exposed the Bank to liability).  The Sixth Circuit, however, disagreed.  Again drawing on similar statutes, the Court agreed with the Plaintiffs that their trust interest in the maintenance escrows attached when the customers' payment for services (the accounts receivable) were deposited in the cash collateral account:

The district court's conclusion that the statutory trust attached to funds in the depository/operating account when the nine cents per mile was deducted from owner-operators' compensation, but did not attach to the funds in the cash collateral account, is illusory. Although the funds flowed to Arctic from its receivables, and Arctic had discretionary, “unencumbered” use of the funds in the depository/operating account, the funds themselves were not unencumbered. The accounts receivable deposited into the cash collateral account were taken by [the Bank] and applied directly to reduce Arctic's outstanding loan balance. Thus, whether the draw on the line of credit passed through an operating account before directly funding the checks is immaterial. Arctic compensated the owner-operators for an amount net of the maintenance escrow, and, instead of funding the escrows through its line of credit, it applied the trust funds to reduce its loan balance, without returning the unused escrow funds to plaintiffs as required under 49 C.F.R. § 376.12(k). 

Thus, under the Bank’s loan agreement, the Bank collected the money placed in the maintenance escrows with Arctic’s accounts receivable and used those funds to repay the money borrowed by Arctic.  Thus, Arctic breached its trust obligations to Plaintiffs by encumbering the escrow funds, and reducing the trust assets, through its lending relationship with the Bank.  Under common law trust principles then, the Bank was required to disgorge the trust property received absent a valid defense. 

Finally, the Sixth Circuit rejected the Bank’s proffered defense that it was a bona fide purchaser for value and thus could take the assets free from the trust.  The Court found that the Bank did not take the assets “for value” because it did not purchase the accounts, but rather held them as collateral.  The Bank could not be a purchaser for value when it had never become the owner of the accounts. 

The Arctic decision ultimately means that banks must closely examine their relationships with motor carriers and be knowledgeable about the possibility that some of the assets collected may be subject to the statutory trust acknowledged by the Sixth Circuit.  These trust may require the segregation of funds, but most assuredly must be taken into account when determining loan availability.