The opinion of the court was delivered by: POLLACK
Plaintiff, an income beneficiary of a personal inter vivos trust of which defendant bank is the trustee, seeks to maintain this suit as a class action under F.R. Civ. P. 23(b)(3). The complaint asserts that the class consists of all persons and institutions who are or have been beneficiaries of any trust or trusts of which defendant is trustee and for whose account defendant executes securities transactions.
Apparently, the defendant administers approximately five thousand trusts either as sole trustee or with others as co-trustee. The number of beneficiaries of these trusts, whether present, future, vested, contingent, or income beneficiaries, or remaidermen, includes many thousands of persons, known and unknown. The trusts for whose account defendant executes or may execute securities transactions involve personal, professional, institutional, inter vivos and testamentary trusts and possibly other types.
The plaintiff seeks to represent not only the beneficiaries of the trust in which plaintiff is interested, but also the beneficiaries of trusts in which she has no interest. Accordingly, the plaintiff has moved for a determination pursuant to F.R. Civ. P. 23(c)(1) that this action is to be maintained as a class action. The defendant opposes the motion on the ground that plaintiff has not satisfied the requirements of Rule 23(b)(3); that the federal claims asserted in the complaint lack any merit and do not justify the burden of maintaining a class action in a federal court; and that the plaintiff's claim is not typical of any claim of the class, as required by paragraph (a)(3) of Rule 23.
The complaint alleges five separate counts; three are based on federal statutes -- the Sherman Act, the Securities Exchange Act and the Federal Reserve Act -- and two are based on state law claims for breach of fiduciary obligations.
The first count asserts that a substantial portion of defendant's business consists of maintaining trust accounts for the benefit of institutional and individual beneficiaries such as plaintiff; that in 1968 the trusts administered by defendant contained more than four and a half billion dollars worth of assets, or more than five percent of the trust funds administered in New York State. In the course of maintaining and administering such trust accounts defendant from time to time purchases and sells securities constituting the corpus of the trust or trusts. And in the course of such transactions defendant retains the services of securities broker-dealers who charge commissions for their services. These broker-dealers keep substantial amounts of money on deposit with banks and additionally they borrow substantial amounts of money from banks. This banking business represents a valuable portion of the revenue-producing business of banks, such as defendant.
The complaint further alleges that since 1938 and before, defendant has entered into understandings with unknown broker-dealers for "reciprocal business" by which the defendant agrees to allocate the securities transactions of its beneficiaries to broker-dealers to the extent that they place their banking business with the defendant; and that this really amounts to mutual " back-scratching", in violation of the duties asserted in the complaint to have been breached.
The purpose and effect of the alleged reciprocity engaged in are charged as restraints on interstate trade or commerce. The complaint asserts that trust beneficiaries have been damaged
by ignored opportunities to secure portfolio advice available from brokers not favored with defendant's orders, by ignored opportunities to secure better executions on transactions; that reciprocal business considerations have induced churn over of trust accounts; and that defendant has made inadequate use of the "third market" to save money for the trusts on executions.
Consequently, says plaintiff, defendant has, for the sake of its own profit, cut off plaintiff and other beneficiaries from their market in violation of Section 1 of the Sherman Antitrust Act (15 U.S.C. § 1) to their damage in the amount of value lost to the trust portfolios and the amount of profit gained by the defendant.
The second claim restates the allegations of the first and adds that defendant held itself out to the plaintiff, her settlor and her class as an expert trustee. However, according to the complaint, defendant fradulently omitted to mention that it would be influenced by its self interest in exacting reciprocal business; that in choosing broker-dealers for the portfolio transactions, the defendant would be unduly influenced by its self interest in exacting reciprocal business to the possible detriment of good portfolio investment advice; and that the defendant would make inadequate use of the "third market" even though that market might be advantageous to the trust.
This count asserts that it was necessary to state these matters just mentioned in order to make the matters which were in fact stated not false and misleading and that the omissions were material.
The foregoing is posed as a violation of Section 10b of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated by the Securities and Exchange Commission under that Act (15 U.S.C. § 78j and 17 C.F.R. § 240.10b-5).
The third count restates all of the foregoing and asserts in addition that a federal statute prohibits any member bank from paying any interest on any deposit which is payable on demand. 12 U.S.C. § 371a. The complaint asserts further that virtually all of the deposits that the defendant has acquired from broker-dealers are payable on demand and in allocating its portfolio business on a reciprocal basis the defendant has been utilizing a device to pay interest on demand deposits in violation of that statute and has been passing on the interest payment as a charge to its trust beneficiaries.
This count asserts that by reason of the passing on of the illegal interest payments as charges, plaintiff and her class, have been damaged by the amount of all such charges and the loss of portfolio value through such payments, and in the amount of the profits which the defendant has gained through such illegal payments at plaintiff's expense. The plaintiff's alleged damages, exclusive of interest and costs, are alleged to exceed the sum of $10,000.00.
The fourth claim reiterates all of the foregoing paragraphs of the complaint and asserts that defendant held itself out as a professional trustee and assumed a position of highest trust and confidence and nonetheless falsely and fraudulently represented and warranted to the plaintiff and other beneficiaries that its profit in connection with administering the trusts would be limited to the charges set forth in its agreement or otherwise as provided by law whereas the defendant knew it was going to make other and further profits through the reciprocal business arrangements and the plaintiff seeks an accounting of these alleged secret profits.
The fifth count restates and reiterates all of the foregoing portions of the complaint and asserts additionally that defendant was under a fiduciary duty to preserve the assets of the trusts and not to apply the proceeds of any administrative expenses of the trusts to its own account. This count asserts that by reason of the waste and conversion expressed, the defendant is liable to restore to the trust for the benefit of the plaintiff and the members of her class the value of all items wasted or converted.
The prayer for relief is for an injunction restraining defendant from reciprocal business practices in connection with trust portfolio transactions; requiring the defendant to pay the plaintiff and the class the amount of damages they incurred or in the alternative to apply such damages to the corpus of the trust. Demand is made that by reason of antitrust violations these damages be trebled and further that an award be made of counsel and accounting fees.
Plaintiff's papers say that the interest of any individual trust beneficiary is one of indeterminate value and may be quite small, and that it would undoubtedly be uneconomic for each trust beneficiary to pursue his or her separate remedy. Plaintiff admits that it would be quite conjectural to attempt to prove that the commission on any given transaction brought defendant specific business from an individual broker. Consequently, the plaintiff charges that it is the system that is at fault and only a class action can adequately attack the system.
It may be useful to examine the nature of the plaintiff's beneficial interests in the trust in which she is directly involved. Plaintiff is the adopted child of the settlors of the trust created in 1938 which names the adoptive mother as the income beneficiary, the plaintiff and the adoptive father as contingent secondary income beneficiaries with powers of appointment and plaintiff, among others, as a contingent remainderman. Since the creation of this trust, plaintiff has partially renounced her power of appointment, received an assignment of one-half of the income interest of her adoptive parent, received intermediate accountings and released and discharged defendant from all manner of responsibility and liability as to all transactions embraced in the accounts through December 31, 1948; and plaintiff's income assignor settled defendant's account and released it through July 15, 1958 and discharged defendant from any and every claim in respect of the trust and the administration thereof to that date.
The record submitted in opposition to the plaintiff's motion details much of the administration of the trust and belies the plaintiff's thesis and at the same time shows matters clearly ...