Plaintiffs Lawrence Padrta ("Padrta") and Ronald D. Holman ("Holman"), individually, and on behalf of all others similarly situated, respectfully submit this Memorandum in Support of Plaintiffs' Motion for Interim Order for Immediate Return of Escrow Funds.

Plaintiffs are independent owner-operators. Defendant is a motor carrier that enters into leases with owner-operators for the transport of freight in interstate commerce. These leases between owner-operators and motor carriers like Defendant are regulated by federal motor carrier leasing regulations, which require the inclusion of certain terms in the leases. See generally, 49 C.F.R. § 376.12.

The motor carrier leasing regulations impose strict requirements on a motor carrier regarding the return of escrow funds to owner-operators after termination of a regulated lease:

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49 C.F.R. § 376.12(k)(6) (emphasis added).

Defendant's standard Lease Agreement with owner-operators states, in pertinent part:

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Exhibit 1, Lease Agreement, ¶ 3.m.

Defendant has required an escrow deposit from every owner-operator that has leased trucks to it -- $1,000.00 per truck in almost all cases. See Exhibit 2, Transcript of Deposition of Carl Higgs, president of Ledar Transport, Inc., pp. 174-175. It is the law of the case that Defendant’s practice has been to breach its owner-operator leases, and then withhold owner-operators' escrow funds when they terminate their leases. See Final Judgment by Default of June 21, 1996, ¶ 2. Furthermore, Defendant consistently has failed to provide a final accounting when it withholds an owner-operator's escrow fund after lease termination. See Exhibit 2, Deposition of Carl Higgs, at 209-210; Exhibit 3, Declaration of Marshall Scott Brown; Exhibit 4, Declaration of Kenneth Reinsch. These business practices led Plaintiffs to institute this class action on March 25, 1996.

On June 21, 1996, Judge Gaitan entered a Final Judgment by Default, finding Defendant "liable for all claims set forth in Plaintiffs' Complaint," and ordering, inter alia, that:

Final Judgment by Default, ¶¶ 2-3 (emphasis added).

Since the entry of this Court’s Judgment on June 21, 1996, Defendant has failed to comply with this Court’s Order to "immediately return" the escrow funds to the members of the Plaintiff Class, and to provide an immediate accounting. See generally, Plaintiffs’ Opposition to Motion to Compel Plaintiffs, filed May 5, 1998; Plaintiffs’ Letter dated June 22, 1998 to Hon. Sarah W. Hays, U.S. Magistrate Judge; Exhibit 5, Declaration of Thomas P. McCann. Indeed, Defendant apparently relies on its failure to render an immediate accounting as justification for its failure to return the escrow funds within 45 days of the respective lease terminations.

Recent evidence demonstrates that Defendant continues in its practice of materially breaching its leases with owner-operators by refusing to pay them in full. Class members are forced to terminate their leases within one year to cut their losses and avoid further injury. Defendant then invokes the "early lease termination fee" clause in its lease by withholding the owner-operator’s escrow deposits without providing the final accounting required by the federal leasing regulations. See Exhibit 3, Declaration of Marshall Scott Brown; Exhibit 4, Declaration of Kenneth Reinsch.

1. Whether 49 C.F.R. § 376.12(k)(6) requires a federally regulated motor carrier that has failed to return an owner-operator's escrow fund within 45 days of lease termination, and also has failed to provide a final accounting of its deductions from the escrow fund within that 45 days, to immediately return the entire escrow fund to the owner-operator.

2. Whether the "early lease termination fee" clause in Defendant’s regulated lease agreement, which nullifies an owner-operator’s right to a return of escrow funds within 45 days of lease termination, is void as against public policy.

I. DOT motor carrier leasing regulations require Defendant to return the owner-operator escrow funds now. A. Specifically, 49 C.F.R. § 376.12(k)(6) requires that within 45 days of termination of an owner-operator lease, the motor carrier (such as Defendant) must either provide a final accounting of its deductions from the owner-operator's escrow fund and return the balance, or return the entire escrow fund. Delay in producing a final accounting of escrow deductions will not delay the return of the entire escrow fund past 45 days. On June 21, 1996, this Court found Defendant liable for the violation of this regulation in failing to return the escrow funds of the Class members, and ordered Defendant to immediately return those funds. Today, almost three years later, Defendant has not returned the escrow funds, nor did it ever provide a final accounting within 45 days of lease termination, in violation of § 376.12(k)(6) and this Court's Order. The escrow funds should be returned now, whether or not an accounting is now available. B. The regulatory background of the 45-day escrow-return rule makes clear that the rule is intended to be strictly followed. Owner-operators comprise an integral, yet vulnerable, segment of the trucking industry that requires special regulatory protections – such as the 45-day rule – to remain financially viable.

II. The "early lease termination fee" in the Defendant's owner-operator Lease Agreements does not justify Defendant's withholding escrow funds. A. This Court ruled on June 21, 1996 that Defendant is liable for its "material breach of the Lease Agreements." Once Defendant has materially breached the lease, the owner-operator is discharged from his obligations under the lease. Thus, the "early lease termination fee" – a penalty against the owner-operator for terminating the lease early – is not enforceable against the owner-operator as a matter of contract law. B. The "early lease termination fee" provided for in Defendant's Lease Agreements is also void as against public policy, and unenforceable. The legislative and historical context of the motor carrier leasing regulations, especially § 376.12(k)(6), make clear that the protections embodied in the regulations were established precisely because owner-operators lack the bargaining power to protect themselves in contract negotiations with regulated motor carriers. Such protections cannot be bargained away by contract. Thus, the protection afforded by the 45-day escrow-return rule would be eviscerated if motor carriers could simply force owner-operators to bargain away that protection in the lease through mechanisms like Defendant's "early lease termination fee."

1. Defendant will not return the escrow funds unless it is compelled to do so by the Court. For three years Defendant has found little incentive to comply with the Court's 1996 Order to return the escrow funds and account for its wrongful deductions from owner-operator compensation. First, Defendant's tactics stalling its compliance with the Default Judgment have protected it from the consequences of judgment, while bringing no adverse effects upon it. Second, defendant's questionable financial condition, and opportunity for profit through breaching its Lease Agreements and then withholding escrow funds, create a strong motive to continue its wrongful practice. Third, Defendant's present-day abuse of owner-operators and recent violation of its Lease Agreements demonstrate Defendant's contempt for this Court's authority and unwillingness to yield to it. Justice requires that Defendant return the escrow funds now, leaving the determination of damages for a time when the accounting has been completed.

1. DOT Regulations Require Defendant to Return the Escrow Funds Now

Both the plain language and regulatory background of the DOT motor carrier leasing regulations mandate that Defendant immediately return the escrow funds that it has withheld from the members of the Plaintiff Class. See 49 C.F.R. § 376.12(k)(6).

1. Plain Language of § 376.12(k)(6) Requires Defendant to Return Escrow Funds Now

Section 376.12(k)(6) of the leasing regulations places two very distinct obligations on a motor carrier that collects escrow money from an owner-operator: 1) the carrier must return the escrow fund to the owner-operator within 45 days of termination of the lease; and 2) if the carrier deducts money from the escrow fund before returning it, the carrier must provide a final accounting of those deductions at the time of the return of the escrow fund. These two obligations are separate. Although the timing of the final accounting is dependent upon the timing of the return of the escrow fund, the return of the escrow fund is governed solely by the 45-day time limit, without any regard for the availability of a final accounting.

This federal regulation unambiguously mandates that "in no event shall the escrow fund be returned later than 45 days from the date of termination." Id. (emphasis added). "No event" shall delay the return of an escrow fund to an owner-operator past 45 days, not even a delay in preparing a final accounting. The only way that a carrier can escape its obligation to return the entire escrow fund to the owner-operator within the 45-day time limit is to withhold legitimate deductions from the fund and produce a final accounting of such deductions "[a]t the time of the return of the escrow fund." Id. (emphasis added). If the motor carrier cannot provide a final accounting of deductions from the escrow fund within 45 days of lease termination, then the carrier has no choice but to return the entire escrow fund to the owner-operator, whether or not deductions would otherwise be appropriate. Any other interpretation of this provision allows a carrier to stall the escrow return beyond 45 days under the pretext of preparing an accounting, thwarting the very purpose of the regulation: the prompt return of the escrow fund back to the owner-operator before he suffers financial hardship. There are many strong policy reasons supporting strict adherence to the 45-day rule established by § 376.12(k)(6). The reasoning behind this rule is set forth in a summary of the Regulatory Background of 49 C.F.R. § 376.12(k)(6), attached as an Appendix for the Court's convenience.

Consequently, a motor carrier that has neither returned an escrow fund within 45 days of termination, nor provided a final accounting within that time, has waived any claim to money in the escrow fund, and is required to return the entire fund to the owner-operator immediately. Plaintiffs do not contend that a carrier under these circumstances is barred from raising claims against an owner-operator for money legitimately owed under the lease agreement. If the carrier wishes to raise such claims it may do so, but it will only have the security of the escrow fund to satisfy such claims for a period of 45 days following termination of the lease. Without such a waiver, carriers would have every reason to violate the 45-day rule, as Defendant has.

In the case at bar, then, Defendant cannot claim that its gross default in returning the Class' escrow funds is justified by the fact that there is no accounting yet, especially when such deficiency is entirely Defendant's fault. The Court-ordered accounting in this case becomes irrelevant, with respect to the return of escrow funds, as soon as 45 days from the date of lease termination has elapsed. Here, the accounting that the Court and Plaintiffs have been trying for years to get from Defendant is relevant solely to Plaintiffs' damages claims (e.g., nonpayment for loads hauled; improper deductions from compensation), which require an accounting to determine their amount. The return of the escrow funds, on the other hand, is simply a transfer of the custody of a discreet, readily-identifiable amount held in trust back to its original owner – no accounting is needed for this restitution.

The fact that Defendant has failed both to return the escrow funds, and to perform a final accounting within the mandatory 45-day time limit, is not in dispute. Almost three years ago, this Court ruled:

2. Ledar Transport, Inc. Is liable for all claims set forth in Plaintiffs' Complaint, including but not limited to:

(A) Defendant's failure to provide an accounting . . . and/or return the escrow funds . . .

Final Judgment by Default, ¶ 2 (emphasis added). As a result of this finding, the Court ordered that Defendant "shall immediately return such funds" to the Plaintiff Class. Id. at ¶ 3 (emphasis added). Defendant's failure to perform a final accounting, in violation of § 376.12(k)(6) and this Court's Order, provides it no justification to further delay the return of escrow funds under the pretext that an accounting is needed to figure out how much escrow money is due to each Class member. Thus, there is no reason why Defendant should not return the escrow funds immediately – since final accountings had not been performed within the requisite 45 days, and are not needed at this late date, when escrow deductions are no longer permitted. See Exhibit 2, Deposition of Carl Higgs, at 209-210. The time for escrow accountings has long since passed.

2. Regulatory Background of § 376.12(k)(6) Demonstrates Intent to Protect Truckers

The regulatory background of the 45-day escrow-return rule appearing in § 376.12(k)(6)

illustrates why the rule must be strictly adhered to: the ICC and Congress realized that the owner-operator segment of the motor transport industry needs special protections to keep it financially viable. See Appendix on Regulatory Background of § 376.12(k)(6). For example, during rulemaking proceedings for the 45-day escrow-return rule, the ICC rejected motor carrier arguments that since shippers have up to 9 months to make claims against a carrier for defective shipment, the time limit for the return of escrow funds should be extended to ensure that the funds continue to protect the motor carrier against such claims. The ICC responded:

Lease and Interchange of Vehicles, 129 M.C.C. 700, 726 (1978) (emphasis added). In upholding this and other portions of the escrow regulations, the District of Columbia Circuit observed:

Global Van Lines, Inc. v. Interstate Commerce Commission, 627 F.2d 546, 551 (D.C. Cir. 1980) (citing 129 M.C.C., at 726; H.R. Rep. No. 1812, 95^th Cong., 2d Sess. 6-7 (1978)) (emphasis added).

Thus, administrative, legislative, and judicial examiners of the trucking industry all have concluded that the rapid return of escrow money back to owner-operators is integral to keeping them financially viable. In this context, it is clear that Defendant's desire to withhold the escrow funds of the Plaintiff Class is subordinated to the Class' need to retrieve the funds – because the Class members simply cannot afford to lose their escrow money. See, e.g., Exhibit 4, Declaration of Kenneth Reinsch, ¶ 9.

Defendant’s standard Lease Agreement imposes an obligation on owner-operators to pay an "early lease termination fee" in the event that the owner-operator terminates the lease within twelve (12) months of signing it. Defendant’s practice is to withhold the owner-operator's escrow account under the terms of the "early lease termination fee," thus eliminating the necessity of returning escrow funds. This practice must be stopped by the Court for two reasons: A. Defendant has materially breached those Lease Agreements, discharging the owner-operators from their obligations under the Lease as a matter of contract law; and B. The "early lease termination fee" is void as against public policy because it requires owner-operators to bargain away the protections established by the 45-day escrow-return regulation.

1. This Court's Ruling That Defendant Materially Breached the Lease Agreements Voids the "Early Lease Termination Fee" Provision

Defendant's material breach of the Lease Agreements with its owner-operators deprives it of any color of entitlement to withhold escrow funds pursuant to an "early lease termination" penalty provision. When a party to a contract materially breaches the contract, the non-breaching party is no longer required to perform under the contract, and penalty provisions against the non-breaching party are not enforceable. See Kansas v. AT&T Corp., 910 F. Supp. 1546, 1553 (D.Kan. 1995) (prior material breach discharges other party's contractual duties); E. Alan Farnsworth, Contracts § 8.15 (2d ed. 1990); Restatement (Second) of Contracts § 237 comment b (1981).

Back on June 21, 1996, this Court ruled, inter alia:

* * *

Final Judgment by Default, ¶ 2 (emphasis added). There is no question, then, that Defendant has materially breached its owner-operator leases. The Court's ruling is the law of the case, and forecloses Defendant from its continued claim that it justifiably withheld escrow funds pursuant an "early lease termination" penalty provision. Defendant simply cannot convincingly argue that it may materially breach a lease with an owner-operator, and then use a penalty provision of that lease to penalize the owner-operator (e.g., forfeiture of escrow funds) when he subsequently terminates his participation under the lease.

The 45-day escrow-return rule is written in absolute terms (i.e., "no event" shall delay escrow return past 45 days). See 49 C.F.R. § 376.12(k)(6). A motor carrier has no authority to eliminate this protection through contract negotiation. The federal leasing regulations were promulgated because owner-operators lack the economic leverage and bargaining power to protect themselves. See Appendix. Permitting motor carriers to extract concessions from owner-operators in contract negotiations that nullify the protections created by regulation would completely frustrate the purpose behind these regulations.

The need for such regulatory protections was summarized by former ICC Chairman O'Neal in the following testimony before Congress:

43 Fed. Reg. 29812 (1978) (emphasis added); see also, Global Van Lines, supra, at 457. This market inequity has persisted to the present day. See Appendix, pp. 6-9.

Nevertheless, Defendant argues that it is allowed to circumvent the protections of the 45-day escrow-return rule by requiring owner-operators to sign a lease containing an "early lease termination fee." This provision robs the owner-operator of the protections created by regulation. It is therefore void as against public policy, and unenforceable.

Defendant has found little incentive to comply with this Court's June 21, 1996 Order; that is why an Interim Order for Immediate Return of Escrow Funds is necessary now. First, since the beginning of this case Defendant has exhibited a flagrant disregard for the Court's authority by ignoring the service of the Plaintiffs' Complaint, ignoring the Court's May 6, 1996 Order to Show Cause, ignoring the Court's orders in its June 21, 1996 Final Judgment by Default, ignoring Magistrate Judge Hays' directives to submit accurate information to the Court and work with Plaintiffs to resolve pending accounting issues, and generally stalling performance of its obligations to return the escrow funds and submit proper accounting information. See generally, Plaintiffs' Opposition to Defendant's Motion to Compel Plaintiffs to Return Files, filed May 5, 1998; Plaintiffs' Letter dated June 22, 1998 to Judge Hays; Exhibit 5, Declaration of Thomas P. McCann. Unfortunately, these tactics have served Defendant well for almost three years – insulating it from judgment, and eliciting no legal repercussions.

Second, the fact that Defendant has testified to the effect that its bank accounts are unable to cover its weekly payments to employees and owner-operators (see Exhibit 5, Declaration of Thomas P. McCann) suggests a clear motive on the part of Defendant to wrongfully appropriate an extra $1,000 for every owner-operator that leases to it. Virtually every owner-operator's escrow fund collected by Defendant is $1,000. See Exhibit 2, Deposition of Carl Higgs, pp. 174-175. By Defendant's own admission, it has leased with over 90 owner-operators (See Exhibit 6; Exhibit 5, ¶ 7); and Plaintiffs have found evidence in Defendant's records of over 170 owner-operators leased to it (See Exhibit 7). Thus, Defendant stands to make between $90,000 and $170,000 by withholding escrow funds pursuant to its "early lease termination fee" if it can induce all the owner-operators leased to it to terminate their leases before one year passes. The alarming number of owner-operators that terminate Defendant's Lease Agreements in under one year – over 90% according to the owner-operator roster that Defendant submitted to the Court on May 29, 1998 (See Exhibit 6) – illustrates that Defendant is engaging in a campaign of mistreating owner-operators to induce them to terminate their leases before expiration of the one-year lease term so that Defendant can harvest the escrow deposits for extra profit.

Third, current complaints from drivers recently leased with Defendant indicate that Ledar has not changed its practice of commingling the escrow funds with its general operating funds, rarely (if ever) returning those escrow funds, and routinely breaching its owner-operator Lease Agreements. See, e.g., Exhibit 3, Declaration of Marshall Scott Brown; Exhibit 4, Declaration of Kenneth Reinsch; Exhibit 5, Declaration of Thomas P. McCann.

Both Marshall Scott Brown and Kenneth Reinsch were owner-operators forced by Ledar to either terminate their leases early and lose their $1,000 in escrow money, or continue under the Lease Agreement and expose themselves to persistent swindling by Defendant. Defendant's familiar pattern of taking $1,000 in escrow money from an owner-operator, essentially forcing the owner-operator to quit before one year elapses by repeatedly breaching its Lease Agreement, then withholding the escrow fund under the pretext that the owner-operator has breached the lease by terminating it early, is unlawful. Nevertheless, this practice continues unabated in the face of Judge Gaitan's ruling against Defendant and his Order of June 21, 1996.

Plaintiffs are asking the Court for relief to which they are clearly entitled – return of their own funds that were to be held in escrow by Defendant. Escrow money is the property of the owner-operator (e.g., Padrta; Holman), held in trust by the carrier (Defendant). Defendant does not have a legitimate claim to the escrow funds of the Plaintiff Class. Any claim that it may have possessed expired 46 days after termination of the respective Lease Agreements, was laid to rest after the Court's findings of liability on June 21, 1996, and was buried after Defendant's 3-year default in complying with this Court's June 1996 Order.

Although the Court recognized Defendant's liability to the Class members back in June 1996, and ordered Defendant to make them whole, Defendant has defied the Court's Orders and appears bent on making a mockery of this entire process. Since Defendant has seen fit to repeatedly test the Court's resolve on this matter, Plaintiffs respectfully submit that the only method of guaranteeing that the members of the Class get at least some of their money back is by granting Plaintiffs' Motion for Interim Order for Immediate Return of Escrow Funds.

Federal regulation provides a carrier with the protection provided by escrowed funds for only a limited period of time following lease termination – 45 days. Defendant may pursue whatever claims it has against former owner-operators, but it must do so without the security of the escrow funds, the return of which is now long overdue.

Respectfully submitted,

Thomas P. McCann
The Cullen Law Firm
1101 30^th Street, N.W., Suite 300
Washington, D.C. 20007
(202) 944-8600
(202) 944-8611 (Facsimile)

Counsel for Plaintiffs

Dated: June 3, 1999

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