Monday, May 20, 2002
Court Says Bank of America Must Refund $40 Million in Trustee’s Fees
By KENNETH OFGANG, Staff Writer/Appellate Courts
Bank of America owes $40 million to trust beneficiaries on whom it assessed trustee’s fees that were not approved by the courts, the Ninth U.S. Circuit Court of Appeals ruled Friday.
Holding that a federal district judge used an inappropriate standard in determining the amount owed by the bank, which admitted the overcharges in 1994, the court held that the beneficiaries are entitled to a proportionate share of the profits the bank made with the misappropriated funds.
Bank of America’s liability in the case is a product of its acquisition of Security Pacific National Bank, which was the trustee for more than 2,500 trusts on which it increased fees nine times between 1975 and 1990 without obtaining the consent of the beneficiaries or the approval of the appropriate courts.
Bank of America acknowledged the problem and refunded $24 million in fees plus $17.8 million in simple interest at the legal rate. But one beneficiary, Carol F. Nickel, filed a class action in San Francisco Superior Court, alleging that the bank violated state law by not compounding the interest, disgorging profits, or making restitution for lost benefits.
The bank removed the action to the U.S. District Court for the Northern District of California, where Judge Charles Legge—who has since retired and is now a private judge—held that return of the overcharges with simple interest was the appropriate remedy.
Legge based his ruling on Probate Code Sec. 16440(a). The statute provides that the remedy for breach of trust by a trustee is the amount lost by the trust as a result of the breach, plus interest; the profit earned by the trustee, plus interest; or profits lost by the trust estate as a result of the breach, whichever is most appropriate.
In concluding that the trusts were limited to the first remedy, Legge reasoned that profits earned by the bank or lost to the trusts as a result of the violations were too speculative to be calculated.
But Senior Judge John Noonan, writing for the Ninth Circuit, said that the trusts are entitled to disgorgement. “The elementary rule of restitution is that if you take my money and make money with it, your profit belongs to me,” the jurist wrote.
The bank didn’t merely overcharge, Noonan explained, but engaged in what an expert witness—the chair of the probate and trust division of the Uniform Law Conference—called “an open-and-shut breach of the trustee’s duty of loyalty.”
There is no “requirement of traceability” in the statute, the judge went on to say. Even if the bank’s profits cannot be traced to specific transactions with money from particular trusts, he said, “the problem of showing where the money went is the tortfeasor’s problem.”
Noting that Security Pacific and Bank of America “were profitable institutions in all years at issue,” and that the overcharges to the trusts resulted in funds that were available for loan or investment, the judge said the remedy granted by Legge was “not appropriate under the circumstances because it does not give the trusts an amount close to equaling a share in the profits made with their money.”
Instead, he declared, “the appropriate remedy is to allot to these unwitting and unwilling contributors a proportionate share of the banks’ profits during the years of misappropriation.”
Judge Stephen Reinhardt concurred, but Judge Ferdinand F. Fernandez dissented. He argued that Legge was generally correct and that the remedy granted by the majority was “excessively speculative and inappropriate.”
The case is Nickel v. Bank of America National Trust and Savings Association, 01-15452.
Copyright 2002, Metropolitan News Company