San Francisco - Sixteen years ago, Carol Nickel's grandfather set up a trust to take care of his family once he passed away. To administer the trust, he turned to Security Pacific National Bank, which ran the second-largest trust department in the western United States.
That decision turned out to be a costly mistake for the Nickel family, just as similar decisions affected thousands of other trust beneficiaries who had turned to the bank because of its reputation as a responsible corporate fiduciary.
For nearly two decades beginning in 1975, Security Pacific - which was acquired by Bank of America in 1992 - raised trust-account fees, in violation of contractual agreements, without informing the beneficiaries. In keeping with normal business practices, the bank added the money into its general cash accounts.
In 1993, the beneficiaries from approximately 2,600 trusts began receiving $24 million worth of refunds from Bank of America, which acknowledged that Security Pacific had overcharged for administering the trust accounts. Also refunded was $18 million worth of simple interest.
But in a trial that began Sept. 16 in federal court in San Francisco, U.S. District Judge Charles Legge will decide whether Bank of America's refund remedy was sufficient. Nickel v. Bank of America National Trust and Savings Association, 94-2716 CAL.
Plaintiffs in the class action argue that it wasn't enough to receive the amounts they were overcharged plus interest. Instead, 6,500 class members are seeking up to another $72 million - an amount based on bank profits allegedly earned on the excess fees or lost profits from trust accounts out of which the fees were drawn.
"When I began getting my quarterly statements, I noticed these quarterly fees and maintenance fees," said Nickel, a Tulare County nurse and one of the class-action plaintiffs. "I was appalled. The fees amounted to more than 20 percent of the trust's income."
But Bank of America is resisting any remedy based on profits allegedly linked to the trust account fees. The bank's lawyers say there is no precedent for such a remedy and also point to the difficulty of calculating what, if any, profits were derived.
"It is impossible to determine whether or not any trustee fees ultimately were used for any particular purpose, including whether or not they were ever used to generate any profits," according to a document filed in court by the Bank of America.
On the opening day of the trial, Legge's courtroom was filled with nearly two dozen lawyers and support staff, with the bulk of them gathered around the defendant's table
Beyond signaling the start of the bench trial, the heavy concentration of lawyers also ushered in the latest chapter in recent class-action litigation revolving around disputes over various banking fees.
There have been a lot of cases," said James Sturdevant, of San Francisco's Sturdevant Law Firm. "I've had about a dozen class actions regarding fees and I've won most of them through trials and settlements."
Beginning in the early 1980's, a series of lawsuits challenged fees charged by banks for bounced checks. A separate class action, which later settled, accused financial institutions of conspiring to set finance charges for credit cards in violation of antitrust laws.
In recent years, banks have also been hit with class actions regarding late and over limit fees assessed on credit card accounts.
"Fifteen years ago, you didn't have to pay to talk with a teller or pay to find out about an account balance," said Sturdevant, who is not involved in the trust-account case. "Banking is increasingly depending on fees and their value has been increasing."
Security Pacific was no exception. In the 1980's executives openly boasted about the trust department's new profitability.
The department shifted its "attitudes toward doing business." Peter Voss then senior vice president at Security Pacific, wrote in a trade publication, which appeared as an exhibit introduced by the class-action plaintiffs. "By the end of 1985, we succeeded in generating $10.7 million in new fee revenue within five quarters. Nobody thought we could do it.
A San Francisco banking lawyer, however, contrasted "quite legitimate" cases dealing with the failure to disclose fees to those that focus on the actual amount of the fees.
In a climate of growing competition among financial institutions for customers, Morrison & Foerster's Kathleen Fisher said fees are best set by the marketplace rather than through litigation.
"If the institution doesn't satisfy the customers, they will walk and the institution will close, " said Fisher, who is not involved in the trust-account case.
Lawsuits, on the other hand, often wind up mostly benefiting attorneys, she said.
"These cases tend to settle fro generous fees for plaintiff and defense lawyers and some amount of restitution to the class, which is extremely small by the time it is spread out," said Fisher. "And this money is drawn from the system and eventually paid by the consumers of those services."
In the pending Bank of America case, the dispute in Legge's courtroom isn't over fees but rather the appropriate remedy for the overcharges.
"The bank has admitted the fee increases were improper,' said Legge as he reminded plaintiffs' attorneys to keep the focus on remedies rather than a rehashing of bank wrongdoing.
Section 16440 of the California Probate Code lays out three different refund options when there is a breach of trust, according to lawyers involved in the case.
Attorneys for Bank of America insist that plaintiffs' requests for profit-based refunds are not legally justified.
In opening trial remarks, Robert Rosenfeld from Heller, Ehrman, White & McAuliffe said the bank chose "the only remedy that has ever been employed in a fee dispute."
The lawyer argued that the plaintiffs can offer no legal authority for their preferred remedy. "Rather, they rely on grand principles, venerated norms or a gestalt sense of how the process should work," he said in court.
In response, plaintiffs' attorneys claim that decades-old cases cited by defense lawyers do not address the situation at issue in the Security Pacific trust-account controversy.
"You won't find case law on this because no corporate trustee that we know about has ever misappropriated money for 20 years," Gilmur Murray, a lead plaintiffs attorney from The Mills Firm in Greenbrae, said in an interview.
That introduces complications, but we are applying very fundamental principles of trust law to a new situation."
Pointing to robust economic conditions that prevailed during the late 1970s and much of the 1980s, Nicole Diller, another Mills attorney, insisted that the class members are entitled to more than simple interest on their fee refunds.
"During the time in question, this country witnessed one of the greatest bull markets in history, and the beneficiaries could have made as much as four times what the bank gave them if that money was invested for them," she said.
Shortly after the trail opened, a lively confrontation occurred between a Yale law professor, testifying for the plaintiffs, and Rosenfeld.
"This is quite an extraordinary event," testified Professor John H. Langbein, one of the countryís leading experts on trust law. "I have never seen such massive, long-running disregard of a trust instrument by a corporate fiduciary....If this case is decided in favor of the defense--of the bankís right to steal with impunity-- this would set a bad precedent."
Rosenfeld, for his part, dismissed Langbeinís "ivory-tower approach" toward trust laws as having little connection to the specifics of California case law. "It offends his sensibility, his sense of how a corporate fiduciary should behave," said Rosenfeld, referring to Langbein's critical reaction to Security Pacific's actions.
"So no remedy, no matter how unprecedented, draconian or at odds with the facts, is too harsh. It is the'shame on you' theory of trust remedies." Indeed, Langbein, clad in black Reebok sports shoes, added a dash of academic eccentricity to the courtroom proceedings.
He and Rosenfeld, for example, traded a few esoteric barbs on topics that ranged from religious traditions--"You need to spend more time with Jesuits," the professor chided the lawyer at one point--to the pronunciation of Latin terms.
"I would have said it better than that," said Langbein after Rosenfeld attempted a Latin phrase. "I'm sure you would have," Rosenfeld shot back.
Legge, meanwhile, listened carefully as Langbein testified that the bankís refund was "unambiguously" unlawful because it chose the most "self-serving" of three remedy options rather than offering the beneficiaries a more attractive alternative.
"The purpose of remedy law... is to restore [beneficiaries] to the position [they] would have obtained had the trustee not breached the trust," he said.
Langbein said the beneficiaries were entitled to a portion of bank profits allegedly connected to the excess trust-account fees under principles related to the law of restitution.
"If you use my property to make a profit, the profit belongs to me," he testified. "One reason for this remedy is to deter wrongdoing."