Claiming broker trust agreement violations, OOIDA and three plaintiffs filed a class action complaint against Pacific Financial and Federal Service Corp. in the Superior Court of the state of Arizona in January. The complaint asks for declaratory relief, injunctive relief and damages.
The named plaintiffs are Thomas and Karen Moore, OOIDA members, doing business as Moore Transportation; Jasmine LLC (owned by OOIDA Member Leslie R. Hines); and K&S Trucking LLC (owned by OOIDA Member Keith McDonald). All hauled loads for a California freight broker known as Alliance Transportation. When Alliance failed to pay, these companies made claims to the broker’s trust funds, which were held by Pacific Financial as trustee.
To be a broker, the FMCSA requires a federal form for a broker MC# called an OP-1, plus a filing for the broker’s agents for service of process. That is called a BOC-3 and lists an address within each state where legal paperwork may be served to the brokerage and then forwarded to the broker.
The third requirement is a surety requirement. Transportation brokers must provide $10,000 in security per the FMCSA’s current requirement. The security requirement will increase to $75,000 later this year.
There are two ways to meet the FMCSA’s requirements. One is a surety bond (BMC-84), and the other is a trust agreement (BMC-85).
To meet the trust requirement, brokers use the services of corporations like Pacific Financial Association Inc. Pacific Financial claims to be the largest issuer of BMC-85s – broker trust agreements – in the country. Under BMC-85 agreements it is the trustee of the funds held as security for the benefit of motor carriers and of shippers doing business with the broker.
According to the complaint, in or about the fall of 2011, Alliance stopped paying carriers who had moved freight for it, prompting claims to be made against the trust. However, Alliance – a non-party in the OOIDA complaint – continued to contract for shipping services. Sometime in October 2011, the claims in total exceeded the available trust funds. Pacific Financial paid no claims until late May 2012 when it then paid all available funds to two motor carriers.
The lawsuit alleges that despite pending claims against the trust, Pacific Financial failed to alert anyone that the Alliance was operating without being “effectively secured,” including the trucking companies moving the loads for Alliance.
Pacific Financial also failed to take steps to trigger Alliance’s duty to replenish the trust and waited several months before serving notice to terminate the trust.
On Jan. 23, 2012, a notice of cancellation of the trust was sent by Pacific Financial to FMCSA. This was at least 96 days after Pacific Financial allegedly knew that the aggregation of claims, on a date of delivery basis, exceeded $10,000.
The trust was canceled on Feb. 22, 2012. A week later FMCSA revoked Alliance’s authority to broker freight.
Alliance declared bankruptcy on April 10, 2012. According to OOIDA’s complaint, it listed more than 300 unsecured “non priority” debts totaling approximately $1.2 million. About 275 of the unsecured debts were to motor carriers, including the plaintiffs, that Alliance never paid for their services.
When Pacific Financial finally did make payment on two of the pending claims on May 24, 2012, it exhausted the trust fund by paying all of one claim and part of a second on a date-of-delivery-basis. All other claimants received nothing.
OOIDA and the named plaintiffs claim that Pacific Financial failed in its job to protect the interests of motor carriers who are the beneficiaries of the broker’s trust. Plaintiffs claim it failed to pay trust claims promptly, favored some trust beneficiaries over others, engaged in conflicts of interest, and failed to terminate the trust when claims exceeded available funds.
OOIDA is represented in the lawsuit by its Washington, DC, counsel, The Cullen Law Firm.
“The gist of the complaint is that Pacific Financial, as a trustee and fiduciary of the broker’s trust, was duty-bound to protect motor carriers, the beneficiaries of the trust,” said Randall Herrick-Stare, attorney with The Cullen Law Firm. “Consistent with a fiduciary’s duty to protect beneficiaries it cannot sit idly by when it has both notice of injury-causing behavior and the capacity to block it.
“That means, when Pacific Financial became aware that Alliance was causing damages to trust beneficiaries, it had a duty to act to block its damaging conduct. OOIDA alleges that, by not acting to terminate the Alliance trust – a condition of its FMCSA license – and by not promptly paying claims – thereby triggering a duty to replenish the trust – Pacific Financial allowed Alliance to continue to operate under the illusion of propriety when it was effectively unsecured.”
Herrick-Stare said by not warning motor carriers considering doing business with Alliance that claims Pacific Financial had already received exhausted its security, Pacific Financial left motor carriers in the dark, without information necessary to protect themselves.
“The result was exposure of motor carriers to breach of contract damages with no recourse to mandatory security,” said Herrick-Stare. “It is alleged that by being too long passive, Pacific Financial undermined the fundamental purpose of broker security.”
What do plaintiffs want?
OOIDA and the plaintiffs are asking that the civil action be certified as a class action and for an award of compensatory damages to the plaintiffs and the class, plus punitive damages. OOIDA serves as representative for its members and does not seek damages for itself.
The proposed class members are approximately 275 motor carriers who contracted with Alliance Transportation, who didn’t get paid, and who are listed in the schedules of Alliance’s bankruptcy petition. The damages incurred by each class member are the amounts invoiced but not paid during the time Alliance was “effectively unsecured,” a time that would have been shorter if Pacific Financial had acted promptly to terminate the trust when claims exceeded $10,000. OOIDA’s complaint estimates the total value of the unpaid invoices to be more than $1 million.
“Pacific Financial is not registered with either California or Arizona as a trust company but presents itself as being in the trust business,” said Herrick-Stare. “OOIDA’s complaint asks for an order declaring that Pacific Financial is in the ‘trust business’ and asks for an injunction prohibiting Pacific Financial from entering into any more BMC-85 trust agreements until it has successfully registered as a trust company with Arizona and California authorities.”
Because of the potential conflict of interest, OOIDA also is asking for an injunction prohibiting Pacific Financial from lending to prospective brokers the money to fund their trusts and at the same time serving as the trustee of those same funds.
OOIDA and the plaintiffs filed the suit in January in the Superior Court of the State of Arizona, Maricopa County. The defendants removed the case to the Federal District Court predicated on their statement that OOIDA’s case was about brokers or carriers, which might pose a federal question.
On April 11, OOIDA’s attorneys filed a motion to remand the case back to the state court. They argued the case is “not an action against a broker. It is an action against a trustee. For that reason alone, there is no ‘inconsistency’ between the laws of Arizona governing the fiduciary duties of trustees and any federal laws regarding the duties of brokers.”
The parties are currently awaiting a ruling from the U.S. District Court for the District of Arizona on the remand issue.
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