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Henderson v. Bank of New York Mellon, N.A.

United States District Court, D. Massachusetts

September 14, 2018

ASHBY HENDERSON and THOMAS HERSHENSON, Individually and on Behalf of All Others Similarly Situated, Plaintiffs,
v.
THE BANK OF NEW YORK MELLON, N.A., Defendant.

          MEMORANDUM AND ORDER

          Patti B. Saris Chief United States District Judge.

         INTRODUCTION

         This proposed class action claims that Bank of New York Mellon, N.A. (“BNY Mellon”), breached its fiduciary duty to its trust beneficiaries by charging excessive and undisclosed fees for the preparation of the trusts' tax returns. The plaintiffs have moved for certification of a class, and both parties have moved for summary judgment. After a hearing, the Court ALLOWS IN PART and DENIES IN PART the motion for class certification (Dkt. No. 285). BNY Mellon's motion for summary judgment (Dkt. No. 315) is ALLOWED IN PART and DENIED IN PART, as detailed below. The plaintiffs' motion for partial summary judgment (Dkt. No. 365) is DENIED.

         FACTUAL BACKGROUND

         The following facts are drawn from the class-certification and summary judgment record. They are undisputed except where stated.

         I. The Parties

         Plaintiffs Ashby Henderson and Thomas Hershenson both seek to represent the proposed class. Henderson is a beneficiary of the Walter H. Wesson Trust (“Wesson Trust”), a trust created under Massachusetts law. Hershenson is a beneficiary of T/D of Morris A. Hershenson Trust f/b/o Lee M. Hershenson (“Hershenson Trust”), a trust created under Pennsylvania law.[1] Both trusts are irrevocable trusts. The trustee of both trusts is BNY Mellon.[2]BNY Mellon administers thousands of trusts, with tens of thousands of trust beneficiaries.

         II. BNY Mellon's Tax-Preparation Services

         Since 2007, BNY Mellon has contracted with PricewaterhouseCoopers (“PwC”) to prepare and file tax returns for most, if not all, BNY Mellon trusts. Since 2008, PwC has prepared the tax returns for both of the trusts at issue here. Prior to the arrangement with PwC, BNY Mellon prepared fiduciary tax returns through its in-house tax department. Two aspects of the PwC arrangement are hotly contested.

         First, the parties dispute the scope of PwC's work. The plaintiffs assert that BNY Mellon “completely” outsourced tax-preparation services to PwC. BNY Mellon asserts that it retained responsibility for performing a variety of ancillary functions necessary to the actual filing of the tax returns -- such as setting internal tax policy, reviewing PwC's work, and reconciling accounting systems with PwC's records.

         Second, the parties dispute whether PwC was paid on a per-trust or aggregate basis. The plaintiffs point to language in the relevant BNY Mellon-PwC contracts that appears to break out tax-preparation fees on a “per account” basis. BNY Mellon points to deposition testimony from its own personnel and PwC officials indicating that the parties negotiated a total aggregate fee based on anticipated volume, and that the per-account figures indicated in the contract documents were calculated after the fact to facilitate a true-up between the parties.

         III. BNY Mellon's Evolving Fee Structures

         Until 2012, BNY Mellon used approximately 1, 500 different fee schedules for its trust customers; that number has been pared to around 100 in more recent years. At least three pertinent to this case were in effect at different time periods: (1) a discrete line-item fee for tax-preparation services; (2) a bundled “fiduciary fee” covering tax preparation and other services; and (3) a bundled “advisory fee” covering numerous services, including tax-preparation work.

         From 2008 to 2012, BNY Mellon used the line-item tax-preparation fee. During this era, the bank generally charged tax-preparation fees of $400 for grantor trusts, $750 for revocable trusts, and between $750 and $950 for irrevocable trusts, depending on complexity. “Simple” irrevocable trusts paid an annual line-item fee of $750. The Wesson Trust was one such trust. “Complex” irrevocable trusts paid a line-item fee of $950. The Hershenson Trust was in this category.

         Notwithstanding these general categories, what a particular trust paid for tax-preparation services could vary from trust to trust and from year to year. For instance, some trusts paid tax-preparation fees as low as $25 per year or had the fees waived. Others paid more than $1, 000 per year for tax-preparation services.

         In 2010, Dr. Lee Hershenson (the plaintiff Hershenson's father) raised questions about his tax fee, along with other fees, to his wealth manager at BNY Mellon. As a result, the Hershenson Trust was converted to a “service fee” of 2 percent of market value per year on its first $500, 000, and 1.75 percent on the next $500, 000 -- with no line-item fee for taxes. It is not clear on this record whether other trusts had similar arrangements, or whether this agreement was unique to the Hershenson Trust. In any event, since 2010, the Hershenson Trust has not been charged a line-item tax-preparation fee.

         Starting in 2012, BNY Mellon changed its fee structure with respect to tax-preparation fees for most trusts. In 2012, the bank shifted those trusts that were still charged a line-item tax-preparation fee to a structure that imposed a bundled “fiduciary fee” and no tax-preparation line-item fee. This shift applied to the Wesson Trust, but not the Hershenson Trust, which remained on the “service fee” schedule described above. Since 2012, the Wesson Trust has not paid a line-item tax-preparation fee. The parties point to nothing in the record indicating how much the “fiduciary fee” was or what it included.

         In late 2013 and into 2014, BNY Mellon changed its fee structures again, moving trusts, on a rolling basis, to a schedule based on “advisory fees.” It is not clear on this record whether or to what extent the “advisory fees” resembled the “fiduciary fees” just discussed. In any event, in 2014, the bank moved both the Wesson and Hershenson Trusts to the AD-75 fee schedule, which is an “advisory fee” schedule. Under this structure, the “advisory fee” covers numerous “front- and back- office services, ” including asset allocation, account administration, portfolio monitoring, performance reporting --and, of course, tax preparation. The “advisory fee” typically ranges from 0.75 percent per year on a trust's first $3 million down to 0.20 percent on anything over $25 million.

         IV. Fee Disclosure

         In 2007, shortly after BNY Mellon hired PwC, the bank crafted a letter to alert customers to the change. It stated: “Reflective of the service, the tax preparation fee will be $400 for grantor trusts, $750 for revocable trusts, and between $750 and $950 for irrevocable trusts, depending on complexity.” The parties dispute to whom, if anyone, this letter was sent.

         In 2012, when the bank shifted to a “fiduciary fee, ” many customers received a letter stating that the new fee “replaces” the former “base fee” and “tax preparation fee.” However, the parties point to nothing in the record explaining in more detail what the “fiduciary fee” covered or how much it cost for customers.

         Starting in 2013 and into 2014, BNY Mellon began alerting customers to its new “advisory fee” system via another letter. This letter described the new system as “a new, more straightforward way of determining fees, ” but the letter did not include any detail on what specific services the fee covered. A separate fee schedule discloses the amount of the fee and what it covers, but it is not clear to whom, if anyone, this fee schedule was provided.

         V. Procedural History

         In February 2015, Henderson filed the original complaint, which raised class action claims that the defendant breached its fiduciary duty when it made imprudent investments of trust assets into affiliated funds. In March 2016, Henderson filed the First Amended Complaint, which added the class claims relating to the tax-preparation fees. After some procedural skirmishing, a Second Amended Complaint (“SAC”) was filed in November 2016, adding Hershenson as a named plaintiff with respect to the tax-preparation claims. The SAC is the operative complaint.

         In late 2017 and early 2018, the parties attempted to settle the case. However, in February 2018, Henderson on her own sent the Court a letter objecting to her own attorneys' proposed settlement. She later withdrew that objection. After a hearing on the proposed settlement, the Court found Henderson's objections compelling and rejected the settlement.

         Henderson has since moved to withdraw her individual and class claims alleging the imprudent investment of trust funds so that she may pursue them in a separate case in Pittsburgh. After an ex parte hearing just with Henderson (but not her warring attorneys) in August 2018 to assess the voluntariness of her decision, the Court dismissed those claims without prejudice. Because of this withdrawal, only Counts IV and V of the SAC remain; both pertain solely to the tax-preparation theory. Count IV asserts a breach of fiduciary duty claim, and Count V seeks an accounting.

         Both Henderson and Hershenson seek to represent the following class to pursue those claims:

The Unlawful Fees Class: From 2008 to the present, all personal trusts: (1) for which BNY Mellon served or serves as trustee, and charged a “tax preparation fee” or “fiduciary” fee for one or more of the covered years, and (2) the paid preparer of the fiduciary return covered by the “tax preparation fee” or “fiduciary” fee was PricewaterhouseCoopers for one or more of the covered years.

         The motions for class certification and summary judgment are fully joined. The Court held separate hearings on each.

         DISCUSSION

         I. Class Certification

         A. Legal Standards

         A class may be certified pursuant to Rule 23 of the Federal Rules of Civil Procedure only if:

(1) the class is so numerous that joinder of all members is impracticable; (2) there are questions of law or fact common to the class; (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class; and (4) the representative parties will fairly and adequately protect the interests of the class.

Fed. R. Civ. P. 23(a). In addition to these four prerequisites, the class must also satisfy at least one requirement of Rule 23(b). Smilow v. Sw. Bell Mobile Sys., Inc., 323 F.3d 32, 38 (1st Cir. 2003).

         Here, the plaintiffs invoke Rule 23(b)(3), which requires the Court to find “that the questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy.” Fed.R.Civ.P. 23(b). The considerations relevant to these findings include:

(A) the class members' interests in individually controlling the prosecution or defense of separate actions;
(B) the extent and nature of any litigation concerning the controversy already begun by or against class members;
(C) the desirability or undesirability of concentrating the litigation of the claims in the particular forum; and
(D) the likely difficulties in managing a class action.

Fed. R. Civ. P. 23(b)(3)(A)-(D).

         Finally, the First Circuit adds an extra-textual ascertainability requirement to the class certification analysis. “[T]he definition of the class must be ‘definite,' that is, the standards must allow the class members to be ascertainable.” In re Nexium Antitrust Litig., 777 F.3d 9, 19 (1st Cir. 2015); Matamoros v. Starbucks Corp., 699 F.3d 129, 139 (1st Cir. 2012) (holding that a class was not ...


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