Banks across the country may have to fight lawsuits and cut their trust fees in the wake of a federal court decision in Philadelphia.
Judge Marvin Katz of the U.S. District Court for the eastern district of Pennsylvania ruled last week that Mellon Bank of Pittsburgh owed $56 million plus 11 years' interest for overcharging trust customers.
The disputed charge was the "sweep fee," imposed when personal trust income was moved into money market accounts.
Officials of Mellon Bank Corp. denounced the ruling and said and appeal was to be filed on Monday.
In a sharply worded opinion, Judge Katz said Mellon's sweep service generated an operating margin of 7,000% in 1991 alone. The bank took in $7 million but spent less than $100,000 on the computer systems used to execute the transactions, he said.
Lawyers for the victorious trust clients said the damages could exceed $100 million once interest is computed back to 1981.
But Mellon officials said that estimate is exaggerated. They added that even if they lose on appeal, they expect Judge Katz's fine will be viewed as excessive and reduced to $10 million or lower.
Prospect for More Suits
Whatever the outcome, the decision has broad implications, because most of the 3,000 banks that exercise trust powers routinely sweep customers' dividends and interest into short-term income-producing accounts, and charge fees equal to or greater than Mellon's.
Trust industry experts said most banks will have to consider dropping or drastically reducing their sweep fees if they cannot justify them.
Lawyers from Greenfield & Chimicles, who argued the class-action case, said more such suits are inevitable.
Fee Termed |Egregious'
"There are certainly banks out there whose practices are going to be subject to scrutiny," said C. Oliver Burt 3d, a partner with the Haverford, Pa., firm, which has continually bedeviled bankers by challenging credit card interest rates, loan pricing, confidentially of regulatory exams, and other policies.
The firm's senior partner, Richard Greenfield, said the sweep decision "is a clarion call to banks everywhere to reform their egregious practices that have long victimized their customers and others who have to deal with these institutions."
The suit against Mellon was filed last August in the name of John B. Upp, a trust beneficiary who since 1981 had paid approximately $4,000 in sweep fees to Mellon Bank and Girard Bank, a Philadelphia institution that merged with Mellon in 1983.
Lawyers said they did not know how many people made up the class of trust clients who could share in the award. Mr. Upp is reportedly entitled to $4,000, plus $75,000 in punitive damages.
Mellon officials said they were confident of prevailing in the appeal.
"The opinion is incoherent, to put it nicely," said Martin G. McGuinn, vice chairman and general counsel of Mellon Bank Corp.
"The irony here is, this is a common industry practice, and our fees were in the low-to-moderate end," he said, adding that sweep fees are permitted by state and federal laws. "Yet our investment performance was in the high end. Our customers got better than average performance for low fees."
Mellon Bank charged a base fee for managing trust accounts, plus a sweep fee for reinvesting income. In his ruling, Judge Katz called the sweep fees excessive, and said Mellon was "double dipping" and "simply feathering its own nest at the expense of funds it holds in trust."
"He says no fee is appropriate," Mr. McGuinn said of the judge. "I think that's just absurd."
Mellon is evaluating whether to stop collecting the fees while the case is in litigation.