Upp v. Mellon Bank, NA, Civ. A. No. 91-5219.

• Decision Date: 07 August 1992
• Docket Number: Civ. A. No. 91-5219.
• Citation: 799 F. Supp. 540
• Parties: John B. UPP, et al. v. MELLON BANK, N.A.
• Court: U.S. District Court — Eastern District of Pennsylvania

799 F. Supp. 540

John B. UPP, et al. v. MELLON BANK, N.A.

Civ. A. No. 91-5219.

United States District Court, E.D. Pennsylvania.

August 7, 1992.

C. Oliver Burt, III, Greenfield & Chimicles, Haverford, Pa., for plaintiffs.

Thomas McGough, Jr., Reed Smith Shaw & McClay, Philadelphia, Pa., for defendant.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

KATZ, District Judge.

FINDINGS OF FACT:

Defendant Mellon Bank, N.A. ("Mellon" or the "Bank") is the successor-in-interest to named defendant Mellon Bank (East), N.A., and to Girard Trust Corn Exchange Bank, later named Girard Trust Bank ("Girard"), which Mellon acquired.

Mellon is a banking association organized under the laws of the United States with its head office in Greensburg, Westmoreland County, Pennsylvania and its executive offices in Pittsburgh, Pennsylvania.

Mellon maintains banking offices in this District, including offices at Mellon Bank Center, 1755 Market Street, Philadelphia, Pennsylvania.

Mellon conducts bank trust operations in the Commonwealth of Pennsylvania.

Beginning in mid-1990, Mellon consolidated the charters of Mellon Bank (East), N.A., Mellon Bank (North), N.A., Commonwealth National Bank, and Mellon Bank (Central), N.A. into the single charter of Mellon Bank, N.A.

Plaintiff John B. Upp, a citizen of the State of Maryland, is a beneficiary of three trusts for which Girard was the original trustee and for which Mellon is now the successor trustee.

Plaintiff is an income beneficiary on certain trusts set up by his grandmother and mother. Plaintiff's mother and grandmother appointed Mellon's predecessor, Girard Bank, as trustee to administer and manage the principal and income of the trusts.

Mr. Upp is the beneficiary of three trust accounts managed by Mellon that have been charged sweep fees. Since 1981, Mr. Upp's accounts have been charged sweep fees of approximately $4,012.14.

In January, 1981, Girard became the first bank in Pennsylvania to provide its trust customers with the opportunity to earn a return through the daily temporary investment of idle cash.

Girard inaugurated an automated system for short-term investment of cash in trust accounts, known as sweeping, on January 1, 1981 for substantially all of its trust accounts.

From the beginning, Girard swept both principal and income cash balances.

Girard was the first bank in Pennsylvania to have a cash sweep system and to charge sweep fees to its trust customers.

When Girard began its cash sweep in 1981, it charged 37 and 1/2 basis points, or $0.375 for every $100 invested in these sweep investments, on an annual basis.

In 1981-82 in Pittsburgh, Mellon designed and developed a system and procedure for the daily temporary investment of idle cash, which was implemented in January, 1983.

In 1984, the Pennsylvania Legislature amended the Estates and Fiduciaries Code 20 Pa.C.S. § 7315.1(b), to permit a fiduciary to "make temporary investment of funds" in short term deposits or investments for which the fiduciary may "make a reasonable charge, in addition to all other compensation to which he is entitled ...". The amended statute became effective October 12, 1984.

The parties have agreed that the rate of Mellon's sweep fee has been 50 basis points since 1985. That is, if $100 was temporarily invested by Mellon every day for one year, the total charge for the entire year for the temporary investment services would be 50 cents.

Mellon changed the sweep system in 1985 so that swept cash from one Mellon bank affiliate (such as Mellon (East)) could be deposited automatically in another, separately chartered Mellon bank affiliate (such as Mellon (Delaware)), a process which enabled Mellon to obtain the maximum FDIC insurance coverage of $100,000 on the deposits in each bank. By 1986, Mellon had four affiliate banks participating in the cash sweep, and the sweep system could accommodate amounts of up to $400,000 with FDIC insurance coverage.

Mellon ended the multi-bank sweep system in 1990 when it consolidated the charters of several bank affiliates into Mellon's charter.

When Girard instituted sweeping in 1981, and Mellon began sweeping income cash in January, 1983, and principal cash from some accounts in September, 1983, both banks sent a letter to trust customers informing them of the new service and, in general terms, the fee charged for it.

Girard sent periodic account statements to trust customers, and the sweep fee, described in general terms, was included in "stuffers" included each time the statements were mailed.

None of this generalized information about sweep fees conveyed the application of the fees to particular accounts in meaningful terms.

Defendant Mellon charges a fee to its trust customers for combining relatively small amounts in various trust funds, which would otherwise be idle, and then investing the aggregate amount. This practice is known as "sweeping," hence the fee is called a "sweep fee." In so doing, the bank is charging an excessive fee for the service. The bank charges a standard fee for managing the trust funds and then "double dips" to charge an unreasonable sweep fee for its services. It is as if Mellon charged a fee for managing the trust funds and then charged separate exorbitant fees for writing letters, making telephone calls, and the other mechanics of investing the trust funds. Mellon knows it is "double dipping" and intends to do so to meet revenue goals. The sweep fees are far out of proportion to a reasonable charge for that service. In short, by charging excessive sweep fees, Mellon is simply feathering its own nest at the expense of funds it holds in trust.

Mellon's Trust and Investment Department ("TID") assesses an annual management fee, expressed in Mellon's fee schedules as a base fee plus a fee based upon the amount of assets managed. This fee is a reasonable charge for the bank's services. The sweep fee is an additional charge on that portion of the trust funds that have daily availability and are "swept." This fee is an excessive charge for the sweeping services. In accounts administered by TID, the assets on which Mellon charges a sweep fee are also included in the assets on which it charges a management fee. In those accounts, the sweep fee is unfair, duplicative, and an overcharge.

The operating margin associated with the sweeping function is far out of proportion to the operating margins associated with other services Mellon provides. Sweeping generated well over $7,000,000 in revenue for 1991. The costs of developing and enhancing the computer system never exceeded $100,000 in any year, although Mellon does not have a practice of tracking and allocating such costs. Consequently, the operating margin for sweeping was over 7,000%.

Although not determinative of the point in issue, but by way of comparison, TID's overall 1991 operating margin was approximately 45% on total revenues of approximately $300,000,000. Mellon's overall profit margin for 1991 before taxes and extraordinary gains was slightly below 10% and that figure net of total TID service fees was about 6%.

In late 1981, the Office of the Comptroller of the Currency took the position that national banks holding funds as fiduciaries must generally invest those funds in income-earning accounts. In 1982, a regulation to that effect was promulgated.

In 1982, one of the developers of the computer system used by Mellon to execute the sweeping procedure, estimated that the direct cost of developing the system would be $73,463.50. Plaintiffs' Exhibit 28. There was even a lower estimate of $58,277.50. Plaintiffs' Exhibit 65.

The largest continuing "cost" listed in that developer's report was lost revenue of $3,000,000. Plaintiffs' Exhibit 90. There was also a cost benefit "loss" of $9,488,705 estimated over five years. Plaintiffs' Exhibit 28. This was an estimate of the "loss" of interest Mellon would suffer compared to what it previously had earned and retained on the idle funds. This is hardly a "cost" since the interest belonged to the trusts, not to Mellon.

The head of TID, categorized computerized sweeping as a function of the trust accounting system rather than as a separate product or service. The bank does not allocate any costs to the cash sweep system and has never done so. Mellon employees testified that in addition to automatic computer functions, there are costs for manual services that must be performed as part of the sweeping process, but they were unable to estimate what those costs might be. No one at Mellon has ever tried to determine the total amount of sweep fee expenses or make an analysis relating sweep fee revenues to expenses. In any case, such costs and expenses would be nominal.

The original plan for sweeping included no fee for the act of sweeping. Rather, the cost of the procedure was to be incorporated into the next revision of the TID Pricing Schedule. On Oct. 13, 1982, the Trust Pricing Committee adopted a policy pursuant to which an annualized fee of $0.30 per $100 of cash invested would be established for sweeping income in Personal Financial Services Division accounts. In 1983, the bank started to sweep income in trust and fiduciary accounts and to charge the fee of $0.30 per $100 of cash invested as part of a new, higher schedule of fees. The letter informing TID customers of the new fees stated that the sweeping procedure created a new benefit for them which justified the new fees.

On Sept. 1, 1983, Mellon began sweeping cash from principal balances on directed trust and custody accounts. Six days later, the Trust Pricing Committee approved a fee of $0.30 per $100 of cash invested for doing so. Again, a letter to customers informed them in general terms of the fees, but Mellon did not reflect the application of the fees to customers' accounts in meaningful terms which would communicate the extra charges so that they could be understood by the average customer.

At approximately the time that the bank started sweeping...