BENEFICIARIES & INDIVIDUAL CO-TRUSTEES SUCCESSFUL IN REMOVING CORPORATE CO-TRUSTEE WELLS FARGO BANK
Updated: Nov 27, 2018
On October 18, 2018, the Orphans’ Court in Susquehanna County (The Honorable Jason J. Legg) in the matter of In re: Warriner Trusts (No. 1977-120 O.C. and No. 1987 – 45 O.C.)(Orphans’ Court of Susquehanna County, October 18, 2018) handed down a lengthy 106-page decision finding that the Petitioners, the beneficiaries and individual co-trustees, of two trusts created under the Wills of Samuel and Stella Warriner, met their burden in having the corporate co-trustee, Wells Fargo Bank (“WF”), removed under 20 Pa. C.S.A. § 7766(b)(4) – Pennsylvania’s Trustee Removal Statute. The ruling also found that The Philadelphia Trust Company (“PTC”) was deemed a suitable successor corporate co-trustee to replace WF, as WF took the position that PTC was unsuitable.
The Court relied upon the factors set forth in Section 7766(b)(4) and the Commonwealth of Pennsylvania Superior Court’s 2013 decision In re McKinney, 67 A.3d 824, 830 (Pa. Super. 2013). The test for removal of a trustee under Section 7766(b)(4) provides that the Petitioner seeking removal must establish by clear and convincing evidence:
1. the removal serves the beneficiaries’ best interests;
2. the removal is not inconsistent with a material purpose of the trust;
3. a suitable successor trustee is available; and
4. a substantial change in circumstances has occurred.
See Warriner, slip op., at 56, citing McKinney, 67 A.3d at 830.
The dispute between the Petitioners and the corporate fiduciary Wells Fargo was fairly typical in the world of trust administration by big national banks. The settlors long ago chose as the corporate fiduciary a small region bank where everyone knew each other and service was built on a personal relationship. Over the years, the small regional bank was gobbled up by bigger and larger players with the accounts eventually residing with Wells Fargo. The trusts once serviced by a dedicated individual, Wells Fargo remolded the service to a team-based approach with many players resulting in a lack of continuity. This change in structure resulted in declining service so claimed the Petitioners. Prior to this team-based approach, the accounts were handled by a dedicated Trust Officer, Dean Walters, Esquire. The Petitioners liked and respected him. Coincidentally, Walters left WF and landed a similar role at PTC and enticed the Petitioners to consider moving the accounts to PTC, assuming WF agreed to resign. PTC promised substantially lower fees and a dedicated person to handle the accounts. WF refused to resign, thus the Petitioners filed the instant action under Section 7766(b)(4) and McKinney.
This is where the opinion gets really to the point, as it was ultimately all about the fees and suitability of the successor trustee. The WF fee structure was substantially higher than the one proposed by PTC. Also, Wells Fargo provided some trust clients a discount on its fee, but in Warriner it did not. Hence, the Court took Wells Fargo to task on these factors with the Court stating:
Wells Fargo’s primary motivation is profit – not service – and the manner in which it handles trust administration fees between trust clients aptly demonstrates a corporate culture that looks to make money even if it means treating clients differently and unfairly. A fiduciary must strive to assure that its actions are equitable – and it cannot be said that disparate fees charged to trust clients by Wells Fargo portrays a trustee seeking to deal with its various trusts with “unbending and inveterate” honest and fair dealing. If one trust is deserving of a fee reduction, then Wells Fargo’s fiduciary obligation requires that all of the trusts that it administers be similarly treated. Instead, Wells Fargo continued to charge the Warriner Trusts a higher administration fee with full knowledge that there were other trusts paying less.
Warriner, slip op., at 71.
The Court went on that in other occasions, Wells Fargo agreed to resign and permit PTC to serve as a successor. In those cases, it agreed to resign because the trust was typically smaller and less profitable, as compared in Warriner were the accounts neared $30,000,000 with over 21 years left to service. After analyzing the evidence, the Court found Wells Fargo was simply motivated by maximizing its profit at the beneficiaries’ expense.
Wells Fargo also charged a flat 6% administration fee associated with natural gas revenues because the trusts held natural gas leases. The Court stressed Wells Fargo did almost nothing to earn this fee and most of the tasks associated with this fee were performed by outside counsel which the trusts paid for directly. As a comparison, PTC agreed to not charge any such service fee for the natural gas revenues.
The Court rejected the use of this arbitrary percentage base formula and considered solely whether the gas revenue fee was fair and reasonable based upon the work performed. Warriner, slip op., at 77. As an example, Wells Fargo charged $159,000 under this 6% administration fee structure which Wells Fargo stated was “industry standard” with little back-up to show for it. To earn this fee, Wells Fargo’s administration was really legal in nature to include: (1) negotiations of the initial lease; (2) negotiations of easement and water access rights; and (3) negotiating lease renewals. Even after paying outside legal counsel to handle the bulk of this work, Wells Fargo found it prudent to tack on another 6% from the lease revenues. Peeling away the layers of the onion over the fee, the Court held Wells Fargo did little to almost nothing to earn such a fee, nor could they provide evidence to justify its reasonableness. PTC’s proposal of charging no such fee going forward smacked in the face of Wells Fargo’s assertion that such a fee was an “industry standard.” The Court further emphasized that “[a] fiduciary cannot seek or accept compensation in absence of performing work for a trust account – and such action constitutes a breach of the fiduciary duty owed to the trust.” Warriner, slip op., at 84.
PTC’s fee structure was also analyzed, and by the Court’s back of the envelope calculation, its fee proposal would save the trusts approximately $60,000 per year and over a 21 year period would result in almost a $1,000,000 in savings. Such a savings is clearly in the best interests of the trusts’ beneficiaries so said the Court.
The last ten (10) pages of the opinion covers the McKinney factors and focuses on a comparison of the service offered by Wells Fargo versus the service to be offered by PTC: increased personal service; personal knowledge of the trust and the beneficiaries financial circumstances; investment philosophy and a host of others. PTC came out ahead in all the categories with PTC in a better position to serve the best interests of the beneficiaries going forward.
Admittedly, the opinion is very narrow and tailored specifically to the facts at hand. However, the take away is that fees are to be taken seriously. If the trust is silent on removal, and there is a suitable successor waiting in the wings, a proposed fee will be scrutinized if it is less than the current trustee provides. Nevertheless, the beneficiaries and PTC are the clear winners here.