Trustee in Fee Dispute Must Repay a Share of Bank Profits

JUNE 3, 2002 VOLUME 9, NUMBER 49

When a trustee charges fees in excess of what is due, how much should it have to repay to the trusts? That was the question posed and decided recently by the U.S. Court of Appeals for the Ninth Circuit, sitting in California.

Security Pacific National Bank merged into Bank of America in 1992. Before the merger, Security Pacific operated a trust department which was handled thousands of trusts. In over 2500 of those trusts, the bank had signed fee agreements with the individuals whose funds had established the trusts.

In each of the trusts in question, Security Pacific’s fee agreement set out a percentage fee and committed the bank not to raise that percentage unless the trusts’ settlors agreed or the probate court ordered the higher fee. Despite those agreements, the bank raised its fees a total of nine times between 1975 and 1990.

When Bank of America took over Security Pacific’s trust department it discovered that fees had been collected illegally. The improper fees amounted to more than small change—Bank of America calculated the overcharge at $24 million, which it refunded in 1994. It also calculated that it owed interest totaling $17.8 million, and refunded that amount as well.

Late in 1994 Carol F. Nickel sued the Bank of America on behalf of one of the trusts and asked that her lawsuit be certified as a class action. She argued that the bank should at least have compounded the interest it paid when it reimbursed the trusts, and that it really should have paid a portion of bank earnings during each of the years of the overcharges. The case ended up in federal court and ultimately in the Circuit Court of Appeals.

California law expressly provides the remedy for a breach of a trustee’s fiduciary duty, but the statute gives the court several options as to how to calculate the damages. One way—the one chosen by the District Court—is to calculate the damage plus simple interest at the legal rate. Another would have been to calculate the amount that each trust would have earned had it been allowed to retain the fees wrongfully collected, but the District Court found that approach to be impossible to implement in 2500 individual cases, and the Court of Appeals agreed.

The third method of calculating damages, rejected by the District Court, was the Court of Appeals’ favorite, however. Saying that “the elementary rule of restitution is that if you take my money and make money with it, your profit belongs to me,” the Court of Appeals ruled (by a 2-1 vote) that the proper measure of damages was to calculate the share of the bank’s profit in each year attributable to the overcharges, and to have that amount paid to the trusts. Nickel v. Bank of America National Trust and Savings Association, May 17, 2002.

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