The opinion of the court was delivered by: LEGGE
This action arises from excessive trustee's fees charged by defendant to over twenty-five hundred trusts for which defendant was the trustee. The trusts were so-called "contractual fee" trusts; that is, trusts which had contracts defining the fees that could be charged by the trustee. The facts of how the excessive fees were charged are not material to this opinion.
The third amended complaint contains forty two causes of action. This court has jurisdiction over the case by virtue of plaintiff's allegations under 18 U.S.C. § 1961, et. seq. This court has supplemental jurisdiction over the causes of action based upon California state law, which are the ones central to this decision.
The case proceeded on the third, fourth and fifth claims, the state law causes of action. The case was so bifurcated, because the court believes that those causes of action pose the issues on which most of the remaining allegations depend: that is, whether the remedy already provided by defendant to the trusts, after it discovered the excessive fees, was the appropriate remedy; or whether plaintiff and her class are entitled to additional relief under California law. The remaining causes of action were therefore stayed pending resolution of those central state law issues. The court resolved the third cause of action before trial; in an order dated August 18, 1995, the court held that if the appropriate remedy includes interest, the interest is simple interest at the legal rate under California Probate Code Section 16441(a). This issue is discussed in Section IV below.
The trial then proceeded on the fourth and fifth causes of action. The trial was conducted by the court sitting without a jury, because the court is of the opinion that those causes of action are issues of equity under California trust law and are not legal claims appropriate for a jury trial.
The trial was conducted, and the court heard numerous witnesses and introduced extensive exhibits. Numerous issues of law were also briefed and argued. The case was then submitted for decision. The court has reviewed the record, the testimony of the witnesses, the exhibits admitted into evidence, the cited depositions,
the cited written discovery responses, the legal arguments of counsel, and the applicable authorities. This opinion, order and partial judgment constitutes the findings of fact and conclusions of law required by Rule 52(a) of the Federal Rules of Civil Procedure.
The foundational facts are not in dispute. The case arises from fees charged by Security Pacific National Bank for its services as the trustee of a large number of trusts. Security Pacific merged into Bank of America in 1992.
At the time of the merger, Bank of America learned that Security Pacific had overcharged some trusts which had contractual fee provisions. Bank of America investigated the issue and then decided to refund the fee overcharges to the trusts. However, the bank continued making fee overcharges until late 1993 or early 1994, while its investigation was going on and refunds were being calculated.
The bank ultimately compensated the trusts in the amount of the fee overcharges, plus interest running from the date of each overcharge. The interest rate was the legal rate of seven per cent for the years 1975 through 1981, and 10% thereafter. Interest was paid on all of the refunds on the basis of simple rather than compound interest. The bank made payments totalling 41.8 million dollars to over 2,500 trusts. That amount consisted of approximately 24 million dollars in refunds of fee overcharges, and an additional 17.8 million dollars in interest.
Plaintiff then filed this class action seeking additional compensation for the trusts. As stated, federal jurisdiction is based upon allegations of R.I.C.O., 18 U.S.C. § 1961, et seq. But the core issues are plaintiff's claims under California trust law, over which this court has supplemental jurisdiction. They are the third, fourth, and fifth causes of action, and they claim that the bank did not give the trusts the appropriate remedy for the fee overcharges. They focus on the appropriateness or inappropriateness, under California trust law, of the reimbursement-with-simple-interest remedy that the bank paid. As stated, the court believes that those causes of action are central to the case and are the ones to be resolved first.
Count three seeks compound rather than simple interest. Count four seeks recovery of profits which may have been made by the bank as a result of the fee overcharges; i.e. disgorgement of the bank's own profits. And count five seeks the recovery of profits which the trusts would allegedly have earned if the excessive fees had not been taken.
All of these claims are based upon California Probate Code Section 16440(a), which provides as follows:
(a) If the trustee commits a breach of trust, the trustee is chargeable with any of the following that is appropriate under the circumstances:
(1) Any loss of depreciation in value of the trust estate resulting from the breach of trust, with interest.
(3) Any profit that would have accrued to the trust estate if the loss of profit is the result of the breach of trust.
Cal. Prob. Code § 16440(a).
In the order filed on August 18, 1995 this court ruled on the third cause of action, although some evidence and opinions were presented on that issue during the trial. For completeness, the court repeats its conclusions on the third cause of action from the August 18, 1995 order. Those conclusions were further supported by the evidence and legal authorities presented during the trial.
The third cause of action seeks a declaration that the interest paid on the overcharges should be compound interest, rather than the simple interest which the bank paid. The court construes this claim to be that if the appropriate remedy is a refund of the overcharges under California Probate Code Section 16440(a)(1), the interest should be compound; or if the appropriate remedy is a disgorgement of profits under subsection (a)(2), then that interest should also be compound.
However, that claim is contrary to Probate Code Section 16441(a). That section provides that if the trustee is liable for interest under Section 16440, then the interest is the "interest that accrues at the legal rate on judgments in effect during the period when the interest accrued." The legal rate of interest on judgments is set by the California Code of Civil Procedure Section 685.010(a). That is simple interest. Big Bear Properties, Inc. v. E. M. Gherman, 95 Cal. App. 3d 908, 157 Cal. Rptr. 443, 446 (1979).
In support of her argument for compound interest, plaintiff cites earlier California cases which had charged trustees with compound interest. She also cites the Restatement of Trusts (1935). However, those authorities are trumped by the statute. Section 16441(a) was enacted in 1986 and is retroactive. It replaced the then existing case law on compound interest, and it differs from the Restatement 's treatment of interest. See 11 Witkin, Summary of California Law, Trusts § 151, at 1007 (9th Ed. 1990). According to the 1986 and 1990 comments of the California Law Revision Commission, Section 16441 was passed expressly to eliminate the availability of compound interest, and is not limited to trust breaches of only a short duration. See 18 Cal. Law Revision Commission Reports, 560-61 (1986); and 20 Cal. Law Revision Commission Reports, 1939 (1990).
Defendant's motion for judgment on the third cause of action was therefore granted. If the form of reimbursement which the bank selected, Section 16440(a)(1), is the correct remedy, or if plaintiff is entitled to the remedy provided by Section 16440(a)(2), the interest is simple interest at the legal rate.
The trial then proceeded on the fourth and fifth causes of action, under subsections 16440(a)(2) and 16440(a)(3). The issue of the amount of plaintiff's damages, if plaintiff's claims are correct, was reserved for a later trial. And the issues defined in California Probate Code Section 16440(b) were also reserved until later.
Plaintiff's legal contentions can be summarized as follows: the bank's taking of the fee overcharges, and its use of those fees for its own purposes, were breaches of trust and of the trustee's duty of loyalty. The beneficiaries are entitled to their choice of remedies, including recovery of the bank's profits or the trusts' lost profits under subsection 16440(a)(2) and (a)(3), and they can select the most favorable measure. Plaintiff argues that the bank instead chose the remedy most favorable to itself; that is, simple interest at the legal rate. Plaintiff contends that because any difficulties in awarding damages under (a)(2) or (a)(3) result from the bank's actions, the burden of proof must be on the bank and all doubts must be resolved in favor of the trusts.
The bulk of the evidence in the trial focused on the issues of whether the (a)(2) or (a)(3) remedies are appropriate ...