Daily Journal Extra - Mar 15, 2004

Bank of America Settles Trust Action for $33 Million

By Amy K. Spees

Bank of America agreed this month to a $33 million settlement for a class action brought by 2,600 beneficiaries of trust accounts the bank allegedly mishandled.

The decade-long dispute has sent a couple of messages, according to Gilmur Murray of Murray & Howard in Oakland, who tried the case for the plaintiffs.

Murray says the $110 million total payout to the plaintiff class far exceeds the profit the bank made by overcharging their accounts and will discourage banks from similar activities. But most important, Murray says, a federal appeals court ruling in the case holds that when a bank wrongfully uses its clients' money to make a profit, those clients are entitled to their share of the earnings.

"Banks make money by using your money," says Murray, who tried the case with his partner Derek Howard. "The 9th Circuit opinion was pretty sweeping. It said if you take my money and make profits on it, the profits belong to me." The 9th Circuit's 2002 decision sent the case back to the District Court, which scheduled a jury trial on the amount of profits the bank made from the misappropriations and how to calculate those profits. The parties then decided to end the litigation.

Bank of America admits to no wrongdoing, and a spokeswoman for the bank says it acted immediately to correct the problem.

"Though there have been several conflicting decisions in the court on this case," says Shirley Norton, bank spokeswoman. "The bank concluded that it was in our best interests at this point to settle and put the matter behind us."

The case, filed in 1994, dates back to 1974 when Security Pacific National Bank, which later merged with Bank of America, began regularly overcharging some trust accounts. The merger took place in 1992, and in 1993 Bank of America voluntarily refunded its clients $42 million: $24 million to account for the overcharges and $18 million in simple interest, an accounting practice that became the crux of 10 years of litigation. Murray says simple interest - interest earned solely on the principal investment - was a common accounting practice a century ago but is unheard of today.

"Every checking account or savings pays compound interest. The interest is added to balance, and you receive interest on the entire amount," Murray says. "With simple interest you receive the same amount of interest no matter how much money is in the account."

Allan Duboff, a corporate securities partner with Loeb & Loeb, says compound interest is the more common practice, but simple interest is the basis of state law.

"Most business and lending transactions do see compound interest," says Duboff, who was not involved with the case. "But in California usury law we still see a bias toward simple interest." If a transaction doesn't specify compound interest, simple interest is the rule, Duboff says.

An account with a $100 balance, at 10 percent interest, would earn $10 annually when calculated with simple interest. With compound interest, the same account would earn $10 the first year, $11 the next, $12.10 the third year and so on, Murray says.

"Over a long period, 20 years or so, the difference is really dramatic," Murray says. "Leaving money in an account a long time is how you earn real substantial interest."

Believing they'd been shorted on interest, the class of trust beneficiaries filed suit in 1994, seeking punitive damages on the mismanagement of the accounts and to recoup the difference in interest.

District Judge Charles A. Legge decided in 1996 that Bank of America's $42 million payout was sufficient but that the arguments for punitive damages should be heard by a jury. Bank of America paid the trustees a $36.5 million settlement on the punitive damages claims in 2000. But in a stipulation to the settlement, the bank granted the trust beneficiaries the option to appeal Legge's decision that they weren't entitled to compound interest.

In May 2002, the 9th U.S. Circuit Court of Appeals reversed Legge's judgment in part, saying the class was entitled to compound, not simple, interest, as well as a share of the bank's profits on the beneficiaries' money. The case was remanded to the lower court, where it settled. According to the settlement agreement, Bank of America contended its payments, based on simple interest, were valid and no further compensation was due after the original refunds were made.

"The Bank based its simple interest refunds on a reading of the California Probate Code that simple interest, at the legal rate on judgments, was the only remedy appropriate under the circumstances," the document reads. "The Bank contended that, properly measured, the Bank's profits were less than the simple interest that was already paid, and therefore no additional payment was due," the document continues.

Murray says the class is made up of small trusts ranging from $500,000 to $1 million in value that were created for children who are unable to earn a living themselves, widowed spouses and charities.

"People are getting back thousands of dollars, but it took 10 years to do it," Murray says.