Escrow: What you should know
This is the fourth in a series of exclusive articles describing how owner-operators can spot illegal motor carrier leasing practices

by Joe Hennessey
The Cullen Law Firm, PLLC

Times are tough. Money is tight. In this economic downturn, motor carriers are doing everything they can to squeeze profit out of every contract. The lease they have with owner-operators is no exception. The establishment of an escrow account in a motor carrier/owner-operator lease is a tempting opportunity for illegal profit by some carriers. Even though the escrow contains an owner-operator’s money, some motor carriers always try to keep it for themselves. 

The federal truth-in-leasing regulations, however, restrict a motor carrier’s use of an owner-operator’s escrow. The Owner-Operator Independent Drivers Association (OOIDA) has filed a number of class action lawsuits to recover escrow funds taken in violation of these regulations. Without having to file suit, however, owner-operators can use the regulations to spot the telltale signs of a motor carrier with itchy fingers. 

This is the fourth in a series of articles entitled “I-376: The Road to Better Treatment from your Motor Carrier.” The federal truth-in-leasing regulations found in 49 CFR 376 establish specific rules that govern the owner-operator/motor carrier relationship. These rules give owner-operators the right to know when and how a motor carrier can use escrow funds. With such knowledge an owner-operator can have some basis to decide whether he or she is being treated honestly by a motor carrier.

The federal escrow requirements 
The escrow regulations are relatively straightforward:

  1. The lease must specify the amount of any escrow fund or performance bond to be established with the owner-operator’s money.
  2. The lease must also identify what specific items or repairs can be paid for with escrow funds. 
  3. The lease must specify how the motor carrier will inform you of every transaction affecting your escrow. Carriers must either clearly indicate on your settlement sheet the amount and description of each escrow deduction or addition or provide a separate monthly accounting of all escrow transactions. 
  4. In addition to this periodic accounting requirement, you can demand an accounting of escrow transactions at any time. If you don’t know what is going on, you should exercise this right in order to keep your carrier honest.
  5. The motor carrier is also required to pay you interest on your escrow funds. To be specific, the interest must be at least equal to the average yield or equivalent coupon issue yield on the 91-day, 13-week Treasury bill as established in the weekly auction by the U.S. Treasury. The current interest rate can usually be found in the business section of your newspaper.
  6. Finally, and perhaps most importantly, the regulations require that the carrier return your escrow funds to you within 45 days from the date the lease is terminated. There are no exceptions to this rule.

The most important thing to remember about these regulations is they make clear that the money deposited in escrow is yours. Escrow funds do not belong to the motor carrier. Not only is a motor carrier barred from allocating the escrow funds as it sees fit, but the motor carrier is a “trustee” of such funds with fiduciary obligations to you. According to a recent ruling by the U. S. Bankruptcy Court in Ohio in the case OOIDA filed against Intrenet Inc., “if escrow is required for any reason” by a motor carrier, those escrow “funds are subject to a statutory trust created by the federal truth-in-leasing regulations for the benefit of the owner-operators.” Accordingly, ruled the bankruptcy judge, “the [escrow] funds are not property of [Intrenet’s] estate.”

Warning signs of wrongful motor carrier escrow practices 
An owner-operator who knows these rules can read a lease and determine whether a motor carrier complies with its basic escrow obligations. Owner-operators, however, must be wary of the less obvious ways carriers try to avoid their basic escrow obligations. Even when a lease appears to contain all of the escrow provisions required by the regulations, motor carriers try to insert other provisions to give themselves greater access to owner-operator escrow. These provisions should be a warning sign to owner-operators that a carrier may not intend to comply with the escrow rules.

“Other obligations” 
Some lease agreements will state that your escrow funds can be used to satisfy any “other obligations” you might have to the motor carrier. Other leases might state that the carrier reserves the right to deduct from your escrow “any other amount you owe to” the motor carrier. Such lease terms violate federal law. They appear to give the motor carrier the right to make escrow deductions for items not specifically itemized in the lease. A carrier who uses such terms to drain your escrow is stealing your money. 
Remember, the escrow obligations not only apply to the regulated carrier with whom you have entered into a regulated service lease, they apply to any “affiliated company” for whom the carrier deducts escrow funds from your compensation to cover your equipment lease. In OOIDA v. Arctic Express Inc. and D & A Associates Ltd., OOIDA sued Arctic, the regulated motor carrier, for escrow violations stemming from its allocation of escrow funds to “other obligations.” OOIDA also sued Arctic’s wholly owned “affiliated company” D & A Associates, with whom owner-operators entered into equipment leases, for violation of the escrow rules. OOIDA did so on the ground that D & A should not be permitted to engage in escrow practices that are illegal as applied to its parent company Arctic. Judge Algernon Marbley of the U.S. District Court in Ohio agreed. Brushing aside Arctic’s claim that it had “substantially complied” with the leasing regulations by expressly stating that escrow funds could be used to satisfy “other obligations,” Judge Marbley stated that “[t]he defendants here did not substantially comply, nor did they slightly comply. Arctic, behind the shield of an affiliated company, D & A, absconded with the plaintiffs’ escrow funds.”

“Upon completion of the lease” 
Other leases may state that you are entitled to the return of your escrow funds “upon the completion of the lease.” This, too, is illegal. The regulations clearly state that escrow funds must be returned within 45 days of the date of the lease’s termination. By making the completion of the lease a condition for the return of escrow funds, a carrier is, in effect, blackmailing you into staying on the job. 

You have already earned the money that goes into escrow. Instead of that money being sent to you in a paycheck, it has been channeled into the escrow. You are entitled to your money, less the deductions properly specified in the lease, whether or not you complete the term of your lease.

“Upon return of property” 
Some leases attempt to condition the return of your escrow funds upon the return of the motor carrier’s property (such as Qualcom equipment, base plates, identification devices, etc …) This condition is illegal. The regulations do allow the carrier to withhold your compensation pending the return of its identification devices. It is illegal, however, for the carrier to withhold the return of your escrow for the return of property. And it is illegal for the carrier to withhold escrow from you for any reason except to make the specific deductions itemized in the lease.

“Accounting at settlement” 
Some carriers only promise to give you an escrow accounting at the final settlement. By then, it is usually too late for an owner-operator to identify and fix improper escrow deductions. You have the right to keep the carrier honest by insisting on an escrow accounting in every settlement sheet or in a separate monthly escrow statement. You may also demand an escrow accounting at any time during the lease. If you request it, the carrier must also provide you with enough information to check the legitimacy of deductions from your escrow.

Some lease agreements may attempt to coerce you to keep driving for the company by holding your escrow funds hostage. This is precisely what OOIDA alleges that Prime Inc. has been doing and precisely why OOIDA filed suit against it to stop the practice. Prime’s lease/purchase agreements unlawfully claimed the right to a complete forfeiture of owner-operators’ “Excess Mileage Rental Account,” “Repair Reserve,” “Tire Replacement Reserve,” and “Security Deposit” if the underlying lease/purchase agreement were terminated prior to expiration of its initial term, if owner-operators did not exercise their option to extend the lease, or if the lease were terminated (presumably by either the owner-operator or Prime) during an extension period and before the lease’s expiration. The trial date for this case is set for early September. 

We need not wait until the Prime trial to know that the forfeiture of escrow funds as a penalty for early termination is illegal. In OOIDA v. Ledar Transport, Judge Fernando J. Gaitan Jr. took note of a provision in the Ledar lease agreement that stated “if this lease is terminated by lessor for any reason within one year of the execution date thereof, then the security deposit shall be considered an ‘early termination fee’ and shall be retained by [Ledar].” Judge Gaitan characterized this provision as “illegal” on the ground it “is a penalty imposed by the carrier, unrelated to actual costs involved with the operation of the leased equipment” and as such it was “an impermissible deduction under 49 CFR § 376.12(k)(6)” requiring the return of escrows within 45 days after lease termination. Judge Gaitan then issued an injunction barring Ledar from performing any regulated transportation until that and other illegal lease provisions were omitted from its standard agreement.

How these rules can help you 
Once you know your rights under the truth-in-leasing regulations, you can predict how your carrier will treat your escrow account. If your lease is missing one or more of the required escrow terms, you can legitimately question whether or not the motor carrier knows its federal obligations. 

If the lease contains one of the warning signs listed above, you may be almost certain that the carrier intends to violate the escrow leasing rules. Finally, if you carefully review each settlement sheet or escrow statement, you should be able to determine whether the carrier is using the funds in your escrow properly. 

As they say in Washington, knowledge is power. The best way to leverage your power with motor carriers is to understand the federal truth-in-leasing regulations. They can help you avoid getting into a bad lease or help you decide whether you are being treated fairly by your current carrier.

In Next issue
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