The suspicions of a Pikesville appliance dealer, angry about losses incurred by his wife's trust account at Maryland National Bank, have led to a $3.2 million award by the state's high court for thousands of trust customers.
Largely upholding a lower court decision, the Maryland Court of Appeals has ordered the state's largest bank to pay the money because the bank "did not act as a prudent investor."
The decision stems from a class-action lawsuit filed against the bank, a unit of MNC Financial Inc., in 1983. Customers filed the suit after the Harvey Cummins, husband of bank customer Carol H. Cummins, discovered several bank practices that resulted in less money to trust beneficiaries.
"I am very grateful that the court system agreed with my opinion of how trust departments ought to be run," said Cummins, co-owner of Cummins Appliance. "I attacked my windmill and won."
When the bank reported a loss on the trust, Cummins said, he went through several years of records and discovered a pattern of money left idle. When he brought this to the attention of bank officials, they were unwilling to help, he said.
Specifically, the bank had a policy of investing only in increments of $1,000 or more when managing trust accounts of $150,000 or larger. The leftover money from the trusts was pooled into a large, non-interest-bearing account. The bank kept the proceeds from the account -- which had daily balances of up to $1 million -- and used some of it to maintain minimum cash requirements mandated by federal regulators.
Also, the bank did not re-invest interest income as it came in. For trusts that paid out quarterly, this meant money made during the first month would sit in a non-interest-bearing account until the payout two months later.
All of this was legal at the time, but the court ruled that it still failed to meet the requirement that trust administrators act as "prudent investors." The minimum investment policy has since been changed by the bank after regulators issued new guidelines in 1982.
"Reasonable persons do not, as a matter of policy, continuously leave uninvested sums up to $999. . . . Reasonable persons do not, as a matter of policy, leave uninvested for up to nearly three months income cash aggregating hundreds of thousands of dollars," said Associated Judge Lawrence F. Rodowsky in the court's unanimous opinion, issued April 18.
The bank argued that investing amounts of less than $1,000, or keeping track of investment income in a joint account from thousands of trusts, would have been expensive. But an internal report by MNC in 1982 showed that several competing banks were investing far more of their trusts' money, down to $500, $100 or even $1 increments in one case.
The Circuit Court in 1989 ordered MNC to pay $3.8 million to about 2,000 trusts that were held by the bank at any time between 1972 and 1982. The Court of Appeals changed the formula for repayment, reducing the amount to about $3.2 million, according to Steven E. Angstreich, an attorney with Levy, Angstreich, Finney, Mann and Burkett of Philadelphia, which represented the account holders.
The money represents 6 percent of the bank's fee income from the trust accounts during the period, and an estimate of the interest income lost by the trust beneficiaries.
"I would venture to say there are millions and millions of people out there who have just as good a cause but the likelihood of them winning is very slim," said Angstreich, who represented Cummins and the other trust customers along with Baltimore attorney Leonard A. Orman.
MNC said its practices were similar to those used by many other banks at the time. But Angstreich said it may be too late for other lawsuits to be filed by other trust beneficiaries.
MNC did not respond to a request yesterday for comment. But Angstreich said the bank has indicated that it will ask the court to reduce the $3.2 million award.