Is a Federal “Trust” also a State “Trust”?

CullenLaw established in court that federal regulations implicitly incorporate state substantive laws for interpretation, compliance, and enforcement purposes

What happens when federal statutes or regulations use words without defining them? When courts confront this situation, they apply various interpretive tools to determine what the laws’ drafters intended and what the words mean. But sometimes the words at issue have a specific meaning in other legal contexts, and often those meanings—and any corresponding legal consequences—carry over. In those cases, affected persons can use state causes of action to enforce those federal rules.

The Court of Appeals of Arizona faced this issue in OOIDA v. Pacific Financial Association, Inc., 388 P.3d 556 (Ariz. Ct. App. Div. 1 2017). There, CullenLaw attorneys, on behalf of the Owner-Operator Independent Drivers Association (“OOIDA”) and a group of trucking companies, sued a financial institution for its failing to protect motor carriers’ interests in its role as “trustee” of a broker “trust” required by federal trucking rules. The defendant financial institution argued that, although it was a “trustee” of a federal broker trust, it was not a state law trustee that owed fiduciary duties to the beneficiary carriers. The plaintiffs established, however, that the regulation’s undefined use of “trust” and “trustee” created a state law trust arrangement, complete with fiduciary obligations owed to the carrier beneficiaries.

In the immediate context, for the first time in the 30 years since the federal government promulgated these regulations, a court recognized that the duties of trustees in administering federally required trusts come from state law. In the broader context, when laws use terms without defining them and those terms have legal significance in other contexts, courts may very well incorporate those other meanings—and the legal consequences associated with them—into the laws at issue.  And just last year, the federal agency applied this principle by restricting who could provide such security instruments to those parties who face greater accountability under other areas of the law.

OOIDA v. Pacific Financial Association, Inc. confirms that when federal regulators use the word “trust,” they create a state law “trust.”

A.  Federal law establishes a framework to secure brokered trucking loads.

Federal trucking laws require brokers—federally regulated companies that broker loads between shippers and motor carriers—to maintain financial instruments to secure the payment of amounts they owe to motor carriers, and third parties like banks or other financial institutions must administer these instruments. See 49 C.F.R. § 387.307; see also 49 U.S.C. §§ 13904(f), 13906(b). That security must take the form of either a surety bond or a trust in a specified minimum amount ($10,000 at the time of the Pacific Financial case). 49 C.F.R. § 387.07(a). Motor carriers or shippers who have not been paid under contracts with brokers can make a claim for payment out of these bonds or trusts. § 387.07(b). The entity that administers the security instrument—often a financial institution—must respond to such a claim within 30 days. See 49 U.S.C. § 13906(b)(2). In theory, these rules create an arrangement that gives confidence to motor carriers who haul loads from brokers that they will be paid. Either:

(1)   The broker satisfies its contractual obligations with the carrier and pays for the shipment in the normal course of business; or

(2)   The broker fails to pay for the shipment, prompting the carrier to make a claim on the trust or bond, and the third-party financial institution evaluates the claim and pays the carrier out of the trust or bond.

On paper, this arrangement makes sense as a way to make carriers whole for unpaid claims while including a “neutral” third party to evaluate whether a carrier properly completed the shipment and is owed payment—i.e., whether the broker is properly withholding payment to the carrier.

The system breaks down (for the carriers providing their equipment and labor) if the third-party financial institution favors the broker because, for instance, the nonpaying broker is a repeat customer of the financial institution (and the unpaid carrier is decidedly not). Thus, in practice, sureties may be incentivized to not be truly “neutral” and can significantly advantage a nonpaying broker through mere inactivity. All the financial institution needs to do is delay acting after receiving a claim of nonpayment from a carrier. Until the financial institution acts, other carriers will not know to avoid taking loads from the delinquent broker. And once carriers’ claims exceed the bond amount, carriers will likely never collect more than pennies on the dollar for their claims.

One potential method for combating a financial institution’s favoring brokers is to impose fiduciary obligations on them in favor of the carriers—i.e., requiring them to protect carriers’ interests and holding them liable if they fail to do so. But the regulatory scheme does not expressly include such obligations. The laws define some of the terms used in this arrangement—such as “financial institution”—but they do not define every term relevant to all parties’ obligations and rights. Specifically, the federal rules refer to “trusts” and “trustees” but do not define those terms. Do these rules create state law “trusts,” incorporating their attendant rights and duties? What happens when federal law uses an undefined term, and that term carries significant legal obligations in another legal context? Pacific Financial answers this question.

B.  In Pacific Financial, carriers’ claims exceeded the broker’s trust after the trustee failed to respond to carriers’ initial claims

OOIDA v. Pacific Financial Ass’n, Inc., 388 P.3d 556 (Ariz. App. 2017), involved a broker’s, Alliance Transportation, alleged failure to pay its contracts with several small business independent motor carriers.[1] Alliance had satisfied its obligations under the federal rules to provide security for its shipping contracts through a trust fund administered by Pacific Financial. Thus, the broker Alliance was the trustor, Pacific Financial was the trustee, and the carriers owed money from Alliance were the beneficiaries. Pacific Financial, 388 P.3d at 559.

According to the complaint, Alliance stopped paying its bills in the fall of 2011, and unpaid carrier claims soon exceeded the $10,000 trust fund (at that time, the rules required at least $10,000 security[2]). Exacerbating the carriers’ woes, Pacific Financial failed to (1) notify carriers that claims against the trust fund exceeded the fund’s balance, (2) require Alliance to replenish the trust, or (3) terminate the trust per FMCSA procedures. Although carrier claims exhausted the trust fund in October 2011, unknowing carriers continued hauling loads through January 2012. Several carriers filed claims against the (already-exhausted) trust fund in January and February 2012. Pacific Financial finally took steps to cancel the trust in late January, and the trust was cancelled a month later. Pacific Financial made no payments to carriers from the trust fund.

C.  The Pacific Financial court determined that the broker rules created a state common law trust

OOIDA and the carriers who took loads from Alliance in December and January sued Pacific Financial. They claimed that Pacific Financial, because it was “trustee” of the broker’s trust fund, owed fiduciary duties to the carriers like any other trust beneficiaries. According to the carriers, when Pacific Financial failed to cancel the trust or take other steps to protect carriers despite receiving credible information that Alliance couldn’t pay its bills (and that unpaid claims exceeded the $10,000 trust fund), Pacific Financial violated its fiduciary obligations to protect the carriers’ interests. The carriers claimed that Pacific Financial violated the state’s (Arizona) trust statutes (the plaintiffs later moved to add claims under Arizona common law of trusts).

Pacific Financial defended primarily on the grounds that, although the federal rules use the words “trust” and “trustee,” those words don’t necessarily create a “trust” recognized under state (common or statutory) trust law. Pacific Financial argued alternatively that even if the federal language does implicate state trust law, this specific trust fund was excluded from the scope of the state trust code and common law.

Reversing a grant of summary judgment in favor of Pacific Financial, the Arizona appellate court found that federal law created a “trust” under Arizona common law (the character of the trust precluded application of the trust statutes), and Pacific Financial, as trustee, owed the beneficiaries (plaintiffs) the fiduciary obligations owed to other common law trust beneficiaries. Pacific Financial, 388 P.3d at 563-64, ¶ 30.

Notably, the court analogized the federal law’s use of “trust” to the use of “trust” language in commercial arrangements, noting the idea that contract drafters use these terms thoughtfully: “[O]ne of the great attractions of the trust for the transaction planner who is designing a business deal is the convenience of being able to absorb these standards into the ground rules for the deal, merely by invoking the trust label.” Pacific Financial, 388 P.3d at 564 n.14 (quoting John H. Langbein, The Secret Life of Trusts: The Trust as an Instrument of Commerce, 107 Yale L.J. 165, 166 (1997)).

Applied here, when the federal government used the word “trust” in its broker security rules, it incorporated the benefits and obligations attendant to a trust arrangement without having to spell out those parameters in the rules’ text.

The federal government recently applied this principle to improve its broker trust rules

The Federal Motor Carrier Safety Administration (“FMCSA”) recently updated its rules applicable to broker registration with this principle in mind. See Broker and Freight Forwarder Financial Responsibility, 88 Fed. Reg. 78,656 (Nov. 16, 2023). FMCSA removed “loan and finance companies” from the list of entities that can serve as trustees for a broker trust specifically because no other laws adequately regulate their conduct: “FMCSA removes loan and finance companies from the list of providers eligible to serve as BMC–85 trustees, because this type of institution is not subject to the rigorous Federal regulations applicable to chartered depository institutions or to state regulations applicable to insurance companies.” 88 Fed. Reg. at 78,657. FMCSA’s changes highlight the importance of considering the legal context of a statute’s or regulation’s terms beyond the scope of that statute or regulation.

Likewise, FMCSA’s insurance requirements implicitly rely on legal obligations established in other legal systems. These rules mandate that motor carriers maintain certain minimum liability insurance coverage to advance highway safety. See 49 C.F.R. §§ 387.1, 387.7, 387.9. But those rules do not set forth each and every obligation on and right owed to the insurers providing these liability policies. Instead, the rules require that carriers can only obtain policies from insurers registered in the states where the carriers operate. See 49 C.F.R. § 387.11. Instead, those state insurance rules govern the insurers’ conduct.

Unsettled areas of statutory and regulatory interpretation give lawyers opportunities to advance their clients’ interests

Pacific Financial and the FMCSA’s recent regulatory changes stand as prime examples of how statutory/regulatory drafting and interpretation does not exist in a vacuum. Legal context matters—where lawmakers use terms and don’t define them, those terms usually carry their ordinary meaning. And often that ordinary meaning incorporates rights or obligations from legal contexts, a premise lawmakers must (and often do) keep in mind when drafting.

CullenLaw has decades of experience adjudicating the meaning of seldom used statutes and regulations to the benefit of our clients. For more information on these broker rules or other transportation regulations, please contact CullenLaw attorneys at info@cullenlaw.com.

[1] Because the parties settled their dispute following the final appellate decision on the legal issue of whether Pacific Financial was a state law trustee, the court made no final fact findings. The facts are, therefore, presented as alleged in the plaintiffs’ complaint.

[2] The rules, as of 2024, require a $75,000 broker bond or trust. 49 U.S.C. § 13906(b)(3).