Packard v. Provident Nat. Bank
| Decision Date | 18 June 1993 |
| Docket Number | No. 92-1753,92-1753 |
| Citation | 994 F.2d 1039 |
| Parties | Parker W. PACKARD; John B. Upp, Individually and on behalf of all others similarly situated, John B. Upp, Appellee, v. PROVIDENT NATIONAL BANK; Mellon Bank (EAST), N.A., Individually and on behalf of all others similarly situated, Mellon Bank, N.A., Appellant, Pennsylvania Bankers Association; Probate and Trust Law Section of the Allegheny County Bar Association; American Bankers Association; Association of Bank Holding Companies; and Independent Bankers Association of America, Amicus-Appellant. |
| Court | U.S. Court of Appeals — Third Circuit |
W. Thomas McGough, Jr. (Argued), Walter T. McGough, Gregory B. Jordan, Perry A. Napolitano, Reed, Smith, Shaw & McClay, Pittsburgh, PA, for appellant Mellon Bank, N.A.
C. Oliver Burt, III (Argued), Brenda M. Nelson, Robin Resnick, Mark C. Rifkin, Miles B. Rittmaster, Greenfield & Chimicles, Haverford, PA, for appellee John B. Upp.
Louise A. Rynd, Pennsylvania Bankers Ass'n, Harrisburg, PA, for amicus-appellant Pennsylvania Bankers Ass'n.
John F. Meck, Houston, Houston & Donnelly, Pittsburgh, PA, for amicus-appellant Allegheny County Bar Ass'n.
John J. Gill, Michael F. Crotty, American Bankers Ass'n Washington, DC, for amicus-appellant American Bankers Ass'n.
Richard M. Whiting, Association of Bank Holding Companies, Washington, DC, for amicus-appellant Association of Bank Holding Companies.
Leonard J. Rubin, Bracewell & Patterson, Washington, DC, for amicus-appellant Independent Bankers Assoc. of America.
Before: SLOVITER, Chief Judge, COWEN and NYGAARD, Circuit Judges.
Mellon Bank appeals from a final judgment of the district court holding certain of its trust fees unreasonable, ordering restitution of those fees to a class of trust beneficiaries and awarding punitive damages to the class representative. Because it is evident to a legal certainty that the requisite amount in controversy for diversity jurisdiction was never recoverable, the district court lacked subject matter jurisdiction. We will therefore vacate its judgment and remand the case for dismissal.
Mellon Bank serves as the trustee of thousands of trusts of varying types. One of its duties as a trustee is to insure that trust assets are invested productively at all times. One of the more problematic aspects of this duty has been the question of how to invest temporarily idle trust account cash. For many years, banks would simply transfer this money to non-interest bearing accounts, in part because of the administrative cost and complexity of investing these usually small sums and in part because suitable short-term investment vehicles were not available. Although there was nothing illegal or improper about this practice, it gave banks a windfall from the "float" and deprived beneficiaries of full return on their funds.
In the early 1980's, computer technology made it cost-effective to invest small sums of idle cash for short periods of time. In addition, various money market funds, which were suitable short-term investments, became available. In 1981, Girard Bank (now merged into Mellon Bank, N.A.) began offering At that time, Pennsylvania law was silent on whether banks could charge the trust for the sweeping service. Nevertheless, both Mellon and Girard began charging "sweep fees" of 30 and 37 1/2 basis points, respectively. 1 Both banks sent notices informing their customers of the sweep fee. In 1984, Pennsylvania enacted a statute authorizing reasonable sweep fees in addition to whatever other compensation the trustee was entitled to receive. See 20 Pa.Cons.Stat.Ann. § 7315.1 (Purdon Supp.1992).
a service known as "sweeping." A sweep service looks daily for idle cash and invests it in an interest-bearing vehicle until the cash is either invested long-term or distributed to the beneficiary. Shortly thereafter, Mellon itself began to develop a sweeping system. In late 1982, the Comptroller of the Currency promulgated regulations under which national banks were required to sweep trust funds
John B. Upp is the beneficiary of three trusts administered by Mellon Bank, all subject to sweep fees. Between 1981 and 1991, Mellon Bank charged Upp $4,012.14 in sweep fees. Upp and Parker W. Packard, a beneficiary of trusts managed by Provident National Bank, filed this diversity suit in district court. Upp and Packard alleged, on behalf of themselves and a class of similarly situated plaintiffs estimated to number at least 5,000, that Mellon, Provident and a class of defendant banks breached their fiduciary duties by, inter alia, charging unreasonably high sweep fees and by not adequately disclosing those fees. 2 Plaintiffs sought compensatory and punitive damages, and to enjoin the defendants from collecting excessive sweep fees in the future.
Defendants first moved to dismiss for lack of subject matter jurisdiction on the ground that the $50,000 jurisdictional amount was not satisfied. Fed.R.Civ.P. 12(b)(1). The motion also requested the district court, in the alternative, to abstain in light of the special expertise and jurisdiction of the Orphans' Court in dealing with trusts. See Reichman v. Pittsburgh Nat'l Bank, 465 F.2d 16 (3d Cir.1972). Plaintiffs filed an opposing memorandum. The next day, the district court denied the motion without argument or explanation. Defendants then answered the complaint.
In April 1992, Mellon filed accountings in the Orphans' Court of Montgomery County in two of Upp's trusts. These accountings specifically raised the propriety of the sweep fees. Upp removed the accountings to federal district court, where they were assigned to the same district judge presiding over the class action. Upon motion from Mellon, the district court remanded the accountings back to the Orphans' Court, citing Reichman and stating that "[r]emand is appropriate in view of the range of issues regarding defendant's exercise of its fiduciary duties which could be raised in these accounting [sic], and the Orphan [sic] Court's particular expertise in the field of supervising the administration of trusts and estates." 3 A month later, the Orphans' Court issued a decree nisi approving Mellon's accounting as to Upp, including On June 5, 1992, Mellon renewed its motion to dismiss for lack of subject matter jurisdiction or in the alternative to abstain. On June 23, three days before plaintiffs filed their memorandum in opposition, the district court once again denied the motion without argument or explanation. On July 24, Mellon moved to stay the proceedings. 5 On July 27, plaintiffs answered. The next day, the district court denied the motion. This time, the district court provided a two page order which stated that because punitive damages were potentially recoverable against a trustee, the jurisdictional amount was satisfied.
the propriety of the sweep fees. Bigelow Trust, 12 Fiduc.Rep.2d 256 (O.C.Mont.Co.1992). 4
On August 3-6, the district court conducted a trial on the merits. 6 On August 7, it issued a fifteen page opinion detailing its findings of fact and conclusions of law. Upp v. Mellon Bank, N.A., 799 F.Supp. 540 (E.D.Pa.1992). The court held that Mellon did not inform its customers of the sweep fees "in meaningful terms," and that the sweep fees were excessive and far out of proportion to a reasonable charge for the sweeping service. Id. at 542. Additionally, the district court stated that Mellon had "feathered its own nest" at the expense of trust funds, id., that it "double dipped" by charging a sweep fee in addition to the normal trust management fee, id., and that before the practice of sweeping began, Mellon treated idle trust fund cash as a "Christmas Club" for its own benefit. Id. at 544.
Based on these findings, the court held that Mellon's conduct was outrageous and showed a bad motive. Id. at 545. It then imposed punitive damages of $75,000 in favor of class representative Upp and ordered restitution of all the sweep fees Mellon had ever charged. Id. at 546. Notwithstanding this ruling in federal court, the Orphans' Court en banc later affirmed the previous decree nisi approving both Mellon's accounting and the propriety of the sweep fees. 7
Mellon timely appealed from the district court's judgment. We have jurisdiction under 28 U.S.C. § 1291.
Mellon's appeal asserts six grounds for reversal: 1. The district court lacked subject matter jurisdiction inasmuch as the amount in controversy requirement was not satisfied; 2. The Orphans' Court adjudication of the accountings collaterally estopped plaintiffs from litigating the sweep fee issue in the district court; 3. The district court abused its discretion in refusing to abstain; 4. The district court erred in certifying the plaintiff class; 5. The district court decided the merits in a manner contrary to Pennsylvania law; 6. The district court erred in its award of compensatory damages. We reach only the first of these contentions. 8
The question of subject matter jurisdiction is a legal issue over which we exercise plenary review. York Bank & Trust Co. v. Federal Sav. & Loan Ins. Corp., 851 F.2d 637, 638 (3d Cir.1988).
Diversity jurisdiction requires an amount in controversy in excess of $50,000, exclusive of interest and costs. 28 U.S.C. § 1332(a). This provision must be narrowly construed so as not to frustrate the congressional It is well-settled that in a diversity-based class action, members of the class may not aggregate their claims in order to reach the requisite amount in controversy. Snyder, 394 U.S. 332, 89 S.Ct. 1053 passim. The Supreme Court has also held that each member of the class must claim at least the jurisdictional amount. Zahn v. International Paper Co., 414 U.S. 291, 301, 94 S.Ct. 505, 512, 38 L.Ed.2d 511 (1973). 9
purpose behind it: to keep the diversity caseload of the federal courts
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