WASHINGTON -- Bank trust department managers breathed a sigh of relief after a federal appeals court affirmed their right to charge fees for sweep accounts.

"The whole industry has been on hold, waiting to see what would happen," said A. Rodney Boren, executive vice president for trust at Norwest Bank, Minneapolis. "Everybody was rather shaken by the initial decision."

Judge Marvin Katz of the U.S. district court for western Pennsylvania ruled last August that Pittsburgh's Mellon Bank owed $56 million, plus 11 years' worth of interest, for overcharging customers by imposing fees on sweep accounts.

Sweep accounts permit quick transfer of dividends, interest, and other payments into money market accounts.

$100 Million Seen at Stake

Lawyers representing the bank's customers said after that decision that Mellon's liability could have exceeded $100 million.

On Tuesday, however, the Third Circuit Court of Appeals overturned that decision, ruling that federal courts lacked jurisdiction. The circuit court said the proper authority was a Pennsylvania state court that had previously ruled in Mellon's favor.

The three-judge panel said Mellon is entitled under state law to charge its customers a reasonable sweep fee and concluded that Mellon's fees were comparable to, or even less than, those charged by other banks.

The court concluded that it was "evident to a legal certainty" that federal court jurisdiction was not proper in this case.

Sarah A. Miller, senior counsel for the American Bankers Association, said the Mellon suit was particularly important because the facts of the case were so favorable to the banking industry.

|Reasonable' fees Condoned

Most states permit banks to charge "reasonable" trust fees. Pennsylvania also specifically permits trust departments to charge fees for sweep accounts.

Had the industry been unable to prevail with a favorable set of facts, Ms. Miller said, "it could have put a chill on the rest of the industry."

Since the Mellon decision, suits were filed against a number of other Philadelphia institutions, including CoreStates. Another Philadelphia bank, Provident National Bank, settled a case.

"We are obviously gratified that the court acted quickly and decisively to overturn the lower-court's opinion," said Michael E. Bleier, general counsel of Mellon Bank.

"This decision, taken together with the Orphans' Court decision, completely vindicates Mellon's position," Mr. Bleier added.

It also should reassure the other 3,000 banks that exercise trust powers. Most of them routinely sweep idle cash into interest-bearings accounts for their customers, at fees as high or higher than Mellon's.

In the lower-court decision, Judge Katz accused Mellon of "double dipping" and "feathering its own nest" in its pricing policy for sweep accounts. Not only did Mellon charge customers for managing their money, they charged again for the sweep service, he said.

The strongly worded opinion concluded that Mellon's sweep service generated operating margins of 7,000% in 1991. The bank charged customers $7 million for a service that cost it less than $100,000, the judge said.

Mellon said previously that the judge's estimate of the profits returned by sweep fees was exaggerated.

Lower-court Decision Hailed

Richard Greenfield, whose Haverford, Pa. law firm brought the suit, had described the lower-court decision was a "clarion call to banks everywhere to reform their egregious practices that have long victimized their customers."

Mr. Greenfield of Greenfield & Chimicles could not be reached for comment on Wednesday.

The suit was filed in August 1991 in the name of John B. Upp, a trust account beneficiary who paid about $4,000 in sweep fees over a 10-year period to Mellon Bank and Girard bank, which was absorbed by Mellon in 1983.

Although an appeal is possible, Ms. Miller of the ABA and others said the strongly worded appellate court decision diminished the likelihood of a successful appeal.

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