SAN ANTONIO, Tex. — Resembling a plot from a TV police drama, the story of Atlas Pallet started out as a disagreement over returning pallets and turned into police raids and a criminal court trial. This story illustrates the lengths to which Chep, the international pallet rental company, will go to maintain control over its pallet pool and the often testy relationship it has with some U.S. pallet recyclers. The aftermath of this case will be felt by more than just Atlas Pallet and its owner Edgar Lozano. However, don’t expect it to settle the major issue of Chep’s rights under their claim of proprietary pallet ownership. Although Edgar was found not guilty and exonerated by the court, the rulings leave many questions unanswered.

The Essence of the Story

When Edgar Lozano’s pallet recycling company began coming across Chep pallets, the San Antonio businessman treated them just like any other pallet.

Eventually, Edgar began receiving letters from Chep representatives. The international pallet rental company mails letters to pallet recyclers informing them that its blue pallets belong to Chep, asking to be notified if recyclers acquire Chep pallets, and warning them that Chep intends to recover its pallets. Chep representatives also began calling him about retrieving the company’s pallets.

"I saw Chep as a potential long-term customer that was interested in a particular pallet which we could continue to provide," said Edgar. "I was not — and still am not — convinced, nor are many others in the pallet industry, that leasing companies can legally maintain ownership over ‘lost’ rental pallets."

Edgar says he has paid dearly for his difference of opinion. He was arrested by local police on charges of stealing pallets from Chep, jailed, and put on trial. On Sept. 29, 1998, Edgar was found not guilty. Upon Chep’s request, authorities continued to pursue Edgar. The police conducted a second "raid" on Atlas Pallet and confiscated forklifts, nailing tools, and other assets. They took the second case to a grand jury in order to have him indicted, but the grand jury refused to charge him, and the case was dismissed.

Edgar said, "The only risk I faced was that Chep would carry out its threats and that the judicial system would fail me in delivering justice. This is the same situation that all other pallet recycling companies face throughout the U.S."

There tend to be three different opinions on proprietary pallet ownership and owner’s rights. The first one is that the company with its name on the pallet owns it, and recyclers should return stray pallets – period. The second is the same as the first except the owner should pay the independent recycler handling and storage fees. The other major view is that the company in possesion of the pallet owns it regardless of whose name is on the property.

Chep’s Interaction with Atlas Pallet

As with other pallet recyclers, blue Chep pallets began showing up in the Atlas Pallet yard during the early to mid-90s. "We went through a whole evolution where at first they were treated like any other pallet, and finally we just let them accumulate," Edgar recalled. "We wanted to do the right thing. But what do you do with something you don’t buy and you don’t sell, that keeps on taking up more space?"

Chep pallets continued to acculumate because they were sprinkled within loads of in-coming mixed pallet cores.

By mid-1996, Atlas Pallet, like other recyclers, was receiving regular notices from Chep saying that its blue pallets were Chep property and must be returned. Chep representatives called. They also visited the Atlas premises and advised employees about the toll-free 800 number they can call and arrange for pick-up of Chep pallets. When Chep officials visited the company, the Atlas staff asked them how much Atlas Pallet would be compensated by Chep for helping to recover Chep pallets. "But then they would take the hard line and say that they could not compensate us because the pallets were stolen property," said Edgar. Atlas personnel responded by explaining that the Chep pallets had been acquired incidentally.

Ralph Buono, a Chep asset manager, took Edgar to lunch. According to Edgar, Buono initially suggested that Chep had made some mistakes and gotten off on the wrong foot with Atlas Pallet. Then Ralph, an ex-police officer, told Edgar that he was well connected to the law enforcement community and that local authorities would side with Chep. Ralph said, according to Edgar, that if Atlas did not cooperate in setting up a recovery program, Chep would seek to have charges brought against him.

Buono said in court, "We talked about the pallets that were currently in his yard, and I had asked him if he would not any longer accept the pallets, especially the people who come in from the street with the pallets. And if he stopped doing so, there would be no market for them, per se, so these street people, as I referred to them as ‘gypsies,’ would no longer take our pallets from behind the various retail stores and bring them to the pallet dealers."

According to Buono, most of the pallets leaving Chep’s closed loop system result from theft. However, many recyclers contend that most of the pallet leakage results from Chep’s customers failing to live up to the letter of their contracts. The truth may be somewhere in the middle.

In court, Buono recalled catching thieves at one, two and three o’clock in the morning stealing Chep pallets from back docks. Lozano’s defense attorney countered that the way Chep’s system is set up recyclers are almost obligated to act as collection centers for Chep pallets. Buono answered, "We inform the pallet dealers not to accept the pallets. You see, if you take away the market, there will be no utilization of the pallets by the people that are trying to sell them."

Edgar and many other recyclers don’t see it that way. "Why do I have to do business with Chep? I should have the right to decide who I will and will not do business with," said Edgar.

Despite the disagreement about how the pallets leak from the system, Edgar could see that Chep was serious about recovering them. Pick-ups were negotiated, although Chep did not agree to compensate Atlas Pallet, according to Edgar. One pick-up was completed, but immediately there were problems, Edgar said. "Chep missed appointment times and didn’t call. We were left with pallets staged, then several days later they would show up."

One pick-up was scheduled early in the week; however, Chep representatives did not show up until Friday at Atlas’ quitting time. Their truck was sent back empty.

Several days later, in November of 1996, Ralph came to Atlas along with about a half-dozen plain clothes police officers. They were there to recover stolen property, the officers told Edgar; the blue pallets were Chep property, and he must return them. He already had an agreement with Chep to recover the pallets, but Chep had failed to retrieve them at scheduled times to which they mutually agreed, Edgar told them.

"I argued with them for two hours until I ran out of saliva," Edgar said. "Finally it dawned on me that they didn’t want an explanation. They were just there to pick up the pallets."

Sergeant Tobe Whitley, the officer that headed up the investigation, suggested that, in the future, any additional Chep pallets should be set outside the Atlas Pallet Company yard. "I couldn’t put them out there because I would be liable," Edgar said.

Officer Whitley said that he would be in charge of Chep pallet pick-up, and that Atlas personnel should call him when a load was ready. According to Edgar, Atlas staff called about a month later. Whitley said that a recovery program had not been set up, and that he did not have time to handle it. Officer Whitley remembers it differently. He said that he tried to work with Atlas Pallet, but the company turned Chep trucks away empty several times.

The Trials

Early the following year, police pursued the case with prosecutors, who presented it to a grand jury. Edgar was indicted in March 1997 on a charge of stealing 616 Chep pallets, which means he would have to stand trial. The felony charge was potentially punishable by up to two years in jail and a fine of up to $10,000. Two police officers visited Atlas after the indictment was returned, arrested Edgar and took him into custody. He was jailed but soon released on bond.

His attorney wanted to negotiate a plea agreement that would result in probation for Edgar, but Edgar maintained that he was innocent and also had other concerns. "I asked my attorney if I would still have to provide these (pallet recovery) services (to Chep) for free," he said. If he pleaded guilty or was convicted, Edgar believed he would have no choice but to provide pallet recovery services to Chep, even if Chep refused to pay him. He decided to plead not guilty and to contest the charge.

The case dragged on for months. Then Edgar took the initiative and made a concerted effort to make his story known. "I thought my only chance was to let as many people as possible know what was going on."

Edgar and his operations manager visited two members of San Antonio City Council. As they were leaving for their scheduled meeting with the police supervisor, a City of Antonio truck brought in a load that contained a Chep pallet. They ran back to the office, got a camera, and took some photographs. They had the film developed immediately and took the pictures with them to police headquarters.

"The superior officer starts coming down on me real hard," Edgar said, "and asks, ‘Where are you getting these pallets from?’ I pulled out the picture. I couldn’t have staged it any better if I tried."

As the summer of 1998 was winding down, Edgar received a demand note from Chep a few days before the trial. His reaction was that he had been instructed to talk only to Officer Whitley about pallet pick-up, and that he had been instructed to await his call.

About 10 days later, in September 1998, police arrived and arrested Edgar for theft a second time. He was handcuffed and taken into custody again, jailed and released on bond. Over the course of the day, as many as 20 police officers were present at Atlas. His second arrest attracted the attention of all five local television news stations.

While he was in jail, Atlas employees told Edgar that the company’s forklifts, nailing tools and other assets were being confiscated by authorities, ostensibly because they were being used to dismantle Chep pallets. At the time, some 1,800 Chep pallets had accumulated in the Atlas yard since Chep’s last pick-up. "But why would I have such a pile of Chep pallets if I had been dismantling them?" he asked.

Because of the television news coverage, customers called, wanting to know if Atlas could continue to supply them with pallets. "I couldn’t even guarantee I could keep out of jail," said Edgar.

Freed on bond, Edgar arrived late at Atlas the next morning. Employees were standing by the time clock, not sure whether to punch in. When he told them to clock in and start working, they asked what they would do without forklifts or nailing tools. Edgar put them to work sweeping and cleaning up.

His attorney obtained a judge’s order to release the equipment, but police objected to prosecutors, who requested a hearing that was scheduled the following day. Prosecutors sought to keep the equipment impounded for 30 days. Edgar was horrified; if the equipment remained impounded, the company could not operate. If it remained impounded for a month, Atlas Pallet could be put out of business. Five Atlas employees already had quit since the latest raid, and many more were looking for other jobs. Surely, if Atlas was not able to do business, many more employees would get jobs elsewhere. Much to his relief, however, at the hearing the judge stood by his earlier order to release the equipment.

When the first case went to trial in September 1998, nearly two years after the first police raid, Edgar was found not guilty. The judge dismissed the case based on a technicality.

"I thought they (Chep) had a good case. The judge did not have an issue with ownership. He had issue with whether Lozano stole pallets or the stringers off the pallets," said Sergeant Whitley.

The trial did not address the core issue – who owns Chep pallets that leak out of the system and who should pay for their storage and return. Ownership is more a matter of civil and not criminal law. Prosecutors later presented the second case to a grand jury, but the grand jury refused to indict him, and the charge was dismissed in November 1998. After being jailed twice, numerous court appearances and proceedings, and a costly legal defense, Edgar was cleared of all charges.

The Outcome

Edgar’s story is a milestone in the debate over ownership and control of proprietary pallets. However, the implications are not clear. Edgar contends that the second case supports his claim that recyclers cannot be successfully prosecuted on charges of stealing rental pallets if they took possession of them during the ordinary course of business. According to the San Antonio District Attorney’s office, the grand jury’s ruling sets no precedent at all. Although the grand jury chose not to indict him, the public can never know what led them to their decision because all grand jury cases and deliberations are confidential.

Despite the official statement from Chep to the contrary (see Chep response, page 54), Edgar’s case may weaken their ability to recover Chep rental pallets without a fight. Lozano’s case shows the industry that Chep is vulnerable in court. Although the case does not set a legal precendent on the ownership issue, it does provide a victory for recyclers. Edgar’s win has delighted some other independent pallet recyclers who have been seeking compensation from Chep in exchange for recovering blue pallets. Last spring Edgar was invited to a national meeting of pallet recyclers in Memphis, Tenn., to tell his story.

Chep signaled late last year that it would begin negotiating with recyclers on an individual basis to compensate them for pallet recovery services — a first. Chep-Canada also recently decided to begin negotiating with pallet recyclers. "We will discuss it with individual pallet dealers," said Michael Dimond, president of Chep-Canada. "We’re not going to quote any kind of recovery fee." A fee will be negotiated "based on the quantity of the pallets they have and their location." The company will pay pallet recyclers a "nominal" fee amount related to pallet sorting or handling and transportation costs, he said; it will not pay a per-pallet fee to recover its pallets. "We’re not paying a bounty on all our pallets," said Michael.

In addition, an internal Chep communication from Ralph to Bob Wells, who at the time was senior manager for asset protection for Chep, sheds more light on the apparent impact of the Atlas Pallet case for Chep. Edgar, as a result of his trials and tribulations with Chep, filed a lawsuit against the pallet rental company early this year. Since then his attorneys obtained a copy of the message from Ralph to Bob, which was sent on the day that Edgar was acquitted at trial. Ralph wrote:

"I’m totally disgusted this is the first case Chep has ever lost. It’s the first time I’ve ever lost a case in my whole history in law enforcement. I don’t know what to say...Sorry I let the company down. Chep should start civil action ASAP. If we don’t, we will lose the San Antonio area and Chep will experience the domino effect throughout the U.S.A.

"Chep may not realize it, but this is the most important action that has happened to Chep since it came to the U.S.A. If not followed up on these results could have serious repercussions with the recovery of our property."

Edgar hopes that, as a result of his case, Chep will not treat any other pallet recyclers the way he was. "But this is not Hollywood," he said.

Edgar has established a Web site to publish and exchange information on the pallet ownership issue; the site is located at www.palletlaw.com.

In his lawsuit, Edgar contends he was falsely accused and wrongly arrested and prosecuted. His business, reputation, and health suffered as a result, he stated in the lawsuit, which seeks damages of $750,000 or more.

Chep 'Denies Vehemently' Recycler's Account

Pallet Enterprise provided Chep with a copy of the accompanying article on Atlas Pallet Co. and asked the company to respond.

Chep spokesman Brian Beattie issued the following statement, which has been edited for clarity:

Chep denies vehemently the allegations (of) Mr. Edgar Lozano. As Chep and Mr. Lozano are currently engaged in litigation, it is clear that Mr. Lozano’s contentions are far from settled, as he implies. Chep looks forward to the opportunity to vindicate its actions and recovery procedures in a court of law.

Chep stands on its record for dealing with pallets that get outside of its system. Chep retains ownership of its pallets and believes that its recovery procedures are fair and legally authorized.

Each month, recyclers across the country cooperate in the return of Chep pallets without incident, and Chep anticipates that they will continue to do so. The unfounded complaints of Mr. Lozano will not diminish the entitlement and ability of Chep to recover its pallets.

Going forward, Chep continues to look for ways to work with manufacturers, distributors and recyclers to lower costs within the supply chain in a manner consistent with Chep ownership of its pallets.

Brian declined to respond to a series of follow-up questions from the Pallet Enterprise.