Many beneficiaries of charitable trusts have been taking banks to court in recent years to argue that the
financial institutions have improperly handled trust money. But sometimes banks sue nonprofit groups when they feel they have been wronged.
The Pennsylvania Supreme Court is expected to rule soon on whether the Wachovia Corporation can increase its fees for overseeing the W.W. Smith Charitable Trust, a $131-million perpetual trust in West Conshohocken, Pa., that supports medical research projects and gives college scholarships to needy students. Wachovia is also seeking to collect more than $5-million in back compensation for years in which it says it was not adequately paid.
A lower court ruling denied Wachovia the right to receive additional payment for past services, but the court ruled that Wachovia could increase its current fees for handling the fiduciary responsibilities of the Smith Trust.
Wachovia has argued that without the additional compensation, it will lose more than $100,000 a year handling the Smith account because of a decades-old formula the trust set for compensating the bank.
Lawyers for the Commonwealth of Pennsylvania, who filed a legal brief siding with the Smith trust, say Wachovia has no right to seek retrospective payments.
“It is strongly offensive that the bank would try to litigate its way to a $5-million windfall for services it has already provided,” says Lawrence Barth, a senior deputy attorney general for the state. He sees a growing distance between donors and bank trustees. Unlike in previous generations, he says, many bank officials who oversee trusts do not live near beneficiaries and have not maintained strong relationships with their customers. That distance, he says, has led many beneficiaries to file complaints against banks.
Making Changes
Lawyers for Wachovia say they set out to change the way the bank is compensated to reflect a change in a state law allowing banks to modify their fee arrangements. They also say that the bank has approved changes to the trust document that were requested by Mary Smith, the widow of William W. Smith, who set up the trust. Mrs. Smith helps oversee the investment management and distribution of charitable assets in the trust. In part because the bank has previously made changes that Mrs. Smith sought, the bank argues that it should be allowed to bring the fee arrangement into line with what it earns from other trusts of similar sizes.
“When Mrs. Smith has asked the bank to cooperate, we have,” says John J. Soroko, a lawyer for Wachovia. “Now that we want modifications in the trust agreement, all of a sudden the trust has become sacrosanct. What we’re asking is not extraordinary. We’re saying the law has been changed. We want to take advantage of it.”
While legal experts say the Smith case is unusual because the bank sued the trust, the case could set a dangerous precedent across the country, says Bruce M. Brown, a former administrator at the W.W. Smith Charitable Trust and now a senior official at two Philadelphia foundations.
“If Wachovia wins this case, they’re coming after other private foundations and other high-net-worth individuals with trusts who give away lots of charitable donations,” Mr. Brown says. “Charities need to pay attention to this, because they’re the ones who could lose.”