In early December 2019, Celadon, an Indianapolis-based truckload carrier that grossed $1 billion as recently as 2015, filed for bankruptcy, making it perhaps the largest trucking company bankruptcy in U.S. history. Celadon employed 2,500 truck drivers and worked with 380 owner-operators. Certain of those owner-operators may have had escrow accounts on trucking equipment which they had contracted to purchase through Celadon or one of its subsidiaries, including Quality Equipment Leasing. It is common practice in such agreements to charge the owner-operator a flat fee or per mile charge for the purpose of repairing and maintaining the trucking equipment during the course of the contract. Importantly, the federal Truth -in- Leasing regulations impose stringent requirements on the handling of such funds, including that they be separately maintained in an interest-bearing escrow account. See 49 C.F.R. 376.12(k). Simply stated, those escrow funds remain the property of the owner-operator, not the carrier or its equipment leasing intermediary.
However, a serious question can arise about the status of such escrow accounts when a carrier files for bankruptcy. Specifically, can a carrier jeopardize the owner-operator’s escrow funds by transferring those funds to a third party, in an attempt to block the owner-operator from recovering its escrow monies after the carrier files for bankruptcy protection? The answer is no. In a landmark case handled by The Cullen Law Firm, PLLC, In re Arctic Express, Inc., 636 F. 3d 781 (6th Cir. 2011), the Firm successfully recovered escrow funds on the ground that such escrows were statutory “trust” funds under the Truth-in-Leasing regulations, 49 C.F.R. 376.12 (k). The court found that, although Arctic had filed for bankruptcy, these trusts were not part of the Arctic “estate” but remained the property of the drivers.
Those funds remained the property of the drivers despite a loan agreement Arctic had with Comerica Bank, Arctic transferred its cash assets to the bank. The court permitted the plaintiffs to file suit against Comerica for participating in Arctic’s breach of its statutory trust duties. The federal appeals court concluded:
Arctic breached its trust obligations to plaintiffs by encumbering the escrow funds, and dissipating the trust assets, through its lending relationship with Comerica. Comerica must, therefore, disgorge the trust property received in breach of trust unless it can establish a viable defense.
The Arctic case establishes that escrow accounts are subject to very strict protections under federal law, which cannot be easily evaded through a bankruptcy filing.
Should you wish to learn more about the protections afforded to escrow accounts under 49 C.F.R. 376.12 (k), and the Arctic precedent, please do not hesitate to contact our attorneys.
Paul D. Cullen, Jr. (202) 944-8600
Daniel E. Cohen (202) 944-8600