Pa. Court Tells Bank It Cannot Raise Fees Charged to Multimillion-Dollar Trust

In a case that many charities and grant makers are following closely, a Pennsylvania court has blocked a bank from increasing the fees it charges to oversee a charitable trust.

The 9-0 ruling by the Superior Court of Pennsylvania overturns a lower-court decision and prevents Wachovia Corporation from increasing its compensation for handling the fiduciary responsibilities of the W.W. Smith Charitable Trust, a $132-million perpetual trust in West Conshohocken, Pa., that supports medical research and gives college scholarships to needy students.

Wachovia, which is expected to appeal the ruling to the state’s Supreme Court, had sued the charity to increase its fees and to receive back compensation of more than $5-million for years in which it says it was not adequately paid.

Lawyers for the Commonwealth of Pennsylvania, who filed a legal brief siding with the Smith trust, say the decision sends a clear signal to banks with agreements specifying the trustee’s compensation that they are bound by the deals they make and cannot seek retroactive compensation or increased fees without first establishing a new agreement with the organizations whose assets they oversee.

“This ruling will make it difficult for banks with fee agreements to increase their rate of compensation independently,” says Lawrence Barth, a senior deputy attorney general for the state.

He added that the decision gives his office the legal authority to challenge any unilateral increase in trustees’ compensation — and that attorneys general in other states could turn to the case for guidance in settling their own complaints between trusts and banks.

Controversial Actions

Relations between many banks and charities have frayed in recent years, in part because of the fast pace of consolidation in the banking industry. In five recent class-action settlements involving more than 450 charitable trusts and thousands of other trust beneficiaries, banks have spent more than $200-million to settle claims that they mismanaged charitable assets (The Chronicle, April 14).

Tension at the Smith Charitable Trust arose after a series of mergers led the banks to reduce the services they provide the trust. Soon after Wachovia’s merger with First Union Bank was completed, in September 2001, the new company stopped providing free office space to the trust and said it would not commit to employing a trust officer dedicated to the Smith trust, court documents show.

But Wachovia argued in court that it was not being fairly compensated for handling the Smith account because of a decades-old formula the trust set for paying the bank. The bank asked the court to allow it to take higher fees because it had helped triple the value of the trust’s assets while its own compensation had gone down during some years.

Officials of the Smith trust asked Wachovia to resign its fiduciary responsibility — saying that if the bank believed its fees were too low for handling the account, it should give up the business. The bank would not resign, and said in court that it would continue to serve as trustee of the Smith Charitable Trust even if the court would not permit it to raise its fees.

The statement by the bank that it would hold on to the fiduciary responsibilities of the trust without getting more compensation was “perhaps the single most persuasive evidence” defeating the bank’s claim for modifying its future compensation, according to the court’s ruling.

If Wachovia files an appeal in the case, as it probably will, it must do so by the end of this month, says John J. Soroko, a lawyer who represents the bank. The state’s Supreme Court then would decide within four to six months if it will consider an appeal.

Getting the highest court in the state to overturn the decision will be difficult to do, says Mr. Barth: “A 9-0 opinion is awfully tough to successfully appeal,” he says. “It’s a greater hurdle for the bank to overcome than if it was a split decision.”