To satisfy a condition of Federal Motor Carrier Safety Administration (“FMCSA”) regulations, a freight broker created a $10,000 trust fund with a financial institution that acted as trustee (Appellee Pacific Financial Association, Inc.), naming as beneficiaries any motor carriers that had contracted with the freight broker and were owed damages. In the fall of 2011, the freight carrier stopped paying motor carriers pursuant to their contracts, and by mid-October, the aggregate of unpaid claims exceeded the $10,000 balance of the trust. The trustee did not notify any trust beneficiaries that the trust had been exhausted.
The trustee filed a notice of cancellation of the trust with the FMCSA on January 23, 2012. The trustee did not make any payments from the trust on pending claims. After the freight broker failed to pay, the unpaid motor carriers filed statutory claims against the trust under the Arizona Trust Code.
The Court of Appeals held that the statutory claims were not viable because the trust was excluded from the Arizona Trust Code, which excludes “trusts for the primary purpose of paying debts,” among other things. A.R.S. § 14-1201(58). The court found that the trustee’s mandatory obligations under its agreement with the freight carrier were focused on paying debts and accordingly concluded that the motor carriers’ statutory claims under the Trust Code fail.
The Court of Appeals also held that § 14-1201(58)’s definition of “trust” did not abrogate the common law of trusts. Title 14 explicitly applies only to “certain trusts,” A.R.S. § 14-1102(B)(4), and two sections of Title 14 state that the principles of law and equity supplement the chapter. A.R.S. §§ 14-1103, 14-10106(A). As such, any trusts excluded from the Trust Code are governed by principles of law and equity, including the common law of trusts. The court noted that the agreement between the trustee and the freight broker meets the elements of a trust rather than a mere contract, as it was entitled “Trust,” referred to trustee as “Trustee,” stated that the $10,000 was “to be held in trust,” acknowledged that the trustee had a fiduciary duty, and did not entitle the trustee to use the trust funds for its own purpose. Because (1) the Trust Code does not abrogate the common law of trusts, and (2) the agreement between the trustee and the freight broker is evidence of the creation of a trust, the court held that the motor carriers are entitled to leave to amend their complaint to assert common law causes of action.
Posted by: Andrea M. Taylor