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Werschkull v. United California Bank
Citations: 85 Cal. App. 3d 981; 149 Cal. Rptr. 829; 1978 Cal. App. LEXIS 2036Docket: Civ. 40491
Court: California Court of Appeal; October 30, 1978; California; State Appellate Court
Participants in an employees' pension plan filed a class action lawsuit against United California Bank (UCB), the plan's trustee, claiming that UCB's 1962 amendment to the plan led to the wrongful diversion of pension trust funds. The plaintiffs asserted that UCB concealed the existence and implications of this amendment, seeking declaratory relief, an accounting of diverted funds, restoration of those funds, and an increase in pensions. They also requested compensatory and punitive damages due to UCB’s fraudulent concealment. The trial was trifurcated by agreement, with the first phase determining the validity of the 1962 amendment according to the plan’s provisions and applicable law. Evidence included an agreed statement of facts, trial exhibits, and expert witness testimony. The San Francisco Bank Employees' Retirement Plan (SFB Plan), effective January 1, 1944, stipulated that pension trust funds could only be used for the exclusive benefit of members and beneficiaries until all liabilities were satisfied. Upon plan termination, the fund was to be distributed based on the actuarial value of accrued pensions. The Bank reserved the right to recover any excess funds due to erroneous actuarial computations only upon termination. Additionally, the plan allowed for amendments by the bank, subject to the limitations stated in section 8. In 1954, San Francisco Bank became First Western Bank and Trust Company (First Western), which continued to administer the San Francisco Bank Plan (SFB Plan) as trustee. Although the SFB Plan was amended in 1954, section 8 remained unchanged. In July 1960, First Western introduced the First Western Bank and Trust Company Retirement Plan (First Western Plan), incorporating the SFB Plan and recognizing it as part of a unified retirement plan. In 1961, First Western merged with California Bank, resulting in the formation of United California Bank (UCB), which became a subsidiary of Firstamerica Corporation, now known as Western Bancorporation. Subsequently, Western Bancorporation established the Retirement Plan for Employees of Western Bancorporation and its Affiliated Banks (Western Plan) and the Supplemental Retirement Plan (Supplemental Plan), both effective January 1, 1962. On September 18, 1961, UCB’s board approved the Western and Supplemental Plans, ceasing further benefits under the SFB Plan after December 31, 1961. The Western Plan allowed the Trustee to accept assets from other qualified trusts, provided they were not commingled unless permitted by the original trust instrument. On November 20, 1961, UCB amended both the First Western Plan and the SFB Plan to prevent new memberships and contributions to these plans, redirecting future employee eligibility to the Western Plan and Supplemental Plan. Section 8 of the SFB Plan was updated to allow the transfer of all pension trust fund assets to the new Retirement Plan effective January 1, 1962. Such assets would continue to provide benefits but be administered as a single fund by the new trustee, which would maintain separate accounts for the transferred assets to allow for equitable distribution and potential retransfers directed by the Pension Committee. The equitable portion of a trust fund determined by the Pension Committee will remain in the fund if it exceeds the pension trust fund's liabilities and certain conditions are met, with excess credited against the Bank's contributions. The SFB Plan, under a 1962 amendment, was not to be discontinued as long as full current costs were met, UCB participated in the Western and Supplemental Plans, and those plans were active. Existing SFB Plan members would continue coverage but earn no further credits under it, instead earning credits under the Western and Supplemental Plans. As of January 1, 1963, the SFB Plan had a reported liability of $2,481,000 against assets of $2,963,000. On August 23, 1963, UCB directed the transfer of SFB Plan assets to the Western Plan and credited $482,000 against its contributions. Additional credits of $100,000 and $180,000.90 were authorized in 1964 and 1968, respectively, with investment income allocated to UCB's Western Plan account and claimed as business expense deductions. By May 24, 1972, liabilities for the SFB Plan were assessed at $1,850,139 against trust assets valued at approximately $2.24 million. Actuary Barthus Prien testified that liabilities cannot be deemed satisfied without plan termination, and that funds from a frozen pension plan used for other purposes would constitute a prohibited transaction. He suggested that terminating a closed plan could resolve excess asset issues. Improvements to the benefits offered by a pension plan were considered. Mr. Prien indicated that if an employer had frozen a pension plan and attempted to use excess assets from that plan to offset contributions to another unrelated plan, it would constitute improper diversion of funds and discrimination against the original plan's participants. He stated that excess assets could only be redirected to other uses upon termination of the pension plan, and noted that the 1962 amendment allowing UCB to credit excess assets against contributions to the Western Plan was improper since the SFB Plan had not been terminated, thus its liabilities remained unsatisfied. Testimony from actuarial consultant Mr. England confirmed that as of September 1964, the SFB Plan's liabilities were not satisfied. In the first trial phase, the court found UCB's 1962 amendment invalid and in violation of specific sections of the Civil and Financial Codes. The second trial phase, conducted before a jury, focused on whether plaintiffs were entitled to punitive damages due to UCB's alleged fraudulent concealment regarding the amendment. The jury affirmed that UCB had a duty to disclose the amendment and had acted with fraudulent intent, resulting in actual damages to the plaintiffs, awarding them $550,000 in punitive damages. The third trial phase addressed whether UCB should be ordered to return excess assets to the SFB Plan and assess actual damages. The court ordered UCB to retransfer the actuarial excesses with interest and to reconsider increasing plaintiffs' pensions. However, UCB did not comply with this order, leading the court to conclude that plaintiffs had suffered actual damages as a result of UCB's wrongful transfers, which hindered the ability to increase their pensions. The court was unable to determine the actual damages incurred by the plaintiffs due to uncertainty regarding potential pension increases that UCB might have granted if wrongful transfers from the SFB Plan had not occurred. Consequently, the court fixed the plaintiffs' actual damages at $1, clarifying that this amount was not an indication of trivial damages but rather a reluctance to assign a higher arbitrary figure. The court awarded $400,000 in attorney's fees and declared the 1962 amendment to the SFB Plan invalid, ordering UCB to return $762,000 plus 7 percent interest to the SFB Plan trust fund. Additionally, the judgment included punitive damages of $550,000 and mandated attorney's fees to be paid from the trust fund. UCB filed an appeal against the judgment, claiming the trial court erred in invalidating the 1962 amendment and its actions under it, arguing that employee pension plans are governed by federal tax law and that overfunding could threaten their tax-exempt status. UCB contended that it could have addressed the overfunding by reducing contributions while keeping the plan operational, and asserted that it was entitled to the actuarial excesses of the fund based on the plan's provisions allowing termination. UCB maintained that the plaintiffs' rights were unaffected by the 1962 amendment and the fund diversions. UCB contends that plaintiffs never had rights to the actuarial excesses from the fund, being entitled solely to pensions as defined by the plan. The court's directive for UCB to restore these excesses to the SFB Plan may negatively impact both UCB and the plaintiffs by potentially overfunding the plan, which could jeopardize its tax-exempt status. UCB argues that the trial court erroneously interpreted the SFB Plan by adhering too strictly to its plain language and general trust law, neglecting the relevant federal tax laws that govern employee benefit trusts. UCB maintains that the 1962 amendment to the SFB Plan and subsequent fund diversions were valid under federal law as 'intra-plan' transfers, asserting that the SFB Plan should be considered part of a comprehensive plan benefiting all employees of Western Bancorporation and its affiliates. UCB's position is supported by its analysis of former section 165(a)(2) of the Internal Revenue Code of 1939 and relevant interpretations, including a Minnesota Supreme Court case. The language in section 8 of the SFB Plan was crafted to comply with the aforementioned tax code requirements, which stipulate that employee benefit trusts should exclusively benefit employees or their beneficiaries. UCB notes an important regulatory shift in 1943 when the IRS revised its stance on intra-plan transfers, implying such transfers would no longer be deemed non-compliant as long as they benefited all employees. This was further reinforced by IRS Revenue Ruling 68-242 in 1968, allowing for the transfer of actuarial excesses between contracts covering different employee groups to address unfunded obligations. In Revenue Ruling 73-534 (1973), the IRS invalidated a transfer between two plans but clarified its prior ruling in Rev. Rul. 68-242, where both annuity contracts were under a single qualified plan, indicating a reallocation of funds among employees rather than a diversion. UCB argues that, following 1943, former section 165(a)(2) of the Internal Revenue Code did not restrict intra-plan transfers of actuarial excesses. UCB posits that the language in the SFB Plan, created in 1944 and derived from section 165(a)(2), should be interpreted to permit intra-plan transfers. UCB contends that transfers among the SFB Plan, Western Plan, and Supplemental Plan constitute one comprehensive pension plan for Western Bancorporation's employees. UCB cites St. Paul Electrical Workers Welfare F. v. Cartier, where a welfare trust, initially providing various benefits, transitioned to a separate pension fund due to concerns over tax-exempt status and actuarial soundness. The Minnesota Supreme Court upheld the transfer of surplus funds to the new pension fund, determining it served the welfare fund's purpose and did not harm beneficiaries. This case differs from UCB's situation as the St. Paul transfer benefitted the same employee group. The transfer of surplus funds from the SFB Plan to the Western Plan primarily benefited employees not associated with the SFB Plan, while failing to provide additional benefits to existing SFB Plan members. The Minnesota Supreme Court in St. Paul highlighted the importance of collective bargaining in fund transfers, contrasting it with the unilateral action taken by UCB in 1962, which occurred without consultation with SFB Plan members. UCB did not demonstrate that its intent behind the fund diversion was to address an overfunding issue that could endanger the SFB Plan's tax-exempt status. Plaintiffs argue that UCB intentionally maintained the SFB Plan's overfunding to use excess earnings for its benefit, rather than genuinely resolving the issue. Actions taken by UCB included halting new memberships and restricting pension credits for current members, ensuring that excess funds would continue to accrue. Despite UCB's claim of addressing the overfunding by diverting $482,000 in 1963, plaintiffs noted that additional surpluses accumulated thereafter. They assert that UCB's actions violated the SFB Plan's anti-diversion provision, which mandates that trust funds can only be used for the benefit of plan members and beneficiaries. Furthermore, plaintiffs maintain that the SFB Plan remains separate from the Western Plan, disputing UCB's interpretation of the anti-diversion provision as permitting intra-plan transfers. Plaintiffs argue that UCB's intent was to maintain the SFB Plan as a separate entity to facilitate the transfer of actuarial excesses into the Western Plan, allowing UCB to claim these transfers as business expense deductions instead of making direct contributions. They highlight that beneficiaries of the SFB Plan differ from those of the Western and Supplemental Plans, as retirees from the SFB Plan would not receive benefits from the latter two plans. Additionally, benefits under the SFB Plan were limited to participants who joined before 1962, and members who remained employed post-1962 accrued credits under separate plans without merging rights. Plaintiffs contend that UCB's claims of proper intra-plan transfers are unfounded. The trial court determined that the SFB Plan and its trust remained active at the time of UCB's fund diversions and concluded that UCB improperly used trust assets for its benefit, effectively reducing its contributions to the Western Plan dollar for dollar, which did not benefit SFB Plan members. The court ruled that the diversions breached the SFB Plan's provisions and violated relevant statutes, including sections of the Civil and Financial Codes prohibiting trustees from using trust assets for personal gain. The findings affirm UCB's violations but raise the question of whether plaintiffs can contest UCB's trustee duties since UCB retained control over the surplus funds. It is acknowledged that UCB could have terminated the SFB Plan and paid plaintiffs directly, yet their claims for punitive damages were based on UCB's alleged concealment of the 1962 amendment and fund diversions—a matter not addressed by the trial judge but presented to a jury after the court's ruling on the impropriety of the actions. Jurors were instructed to award punitive damages to plaintiffs only if they found that UCB had fraudulently concealed a 1962 amendment and three fund diversions that resulted in actual damages to the plaintiffs. The jury was not required to assess the wrongfulness of the amendment or diversions, as the case for punitive damages was solely grounded in the concealment. The amount of actual damages was to be determined by the trial court, which ultimately set it at $1, based on the view that the diversions hindered UCB's ability to enhance plaintiffs' benefits under the SFB Plan. The trial judge explicitly noted that this finding did not rely on the concealment issue, emphasizing that the extent of damages due to the diversions was uncertain and speculative. The court did not grant punitive damages, as the jury's prior decision on that matter was incorporated into the judgment. Since plaintiffs based their punitive damages claim solely on UCB's alleged concealment, they could not argue for punitive damages based on the amendment and fund diversions. UCB conceded the concealment of the amendment and diversions but argued that acting on counsel's advice negated any fraudulent intent. However, the law specifies that a trustee must inform beneficiaries of any adverse interests, and UCB’s actions were deemed a violation of this duty, constituting fraud against the beneficiaries. UCB, as a trustee, was obligated to inform the plaintiffs about the amendment and fund diversions. Established law mandates that individuals in a position of trust must fully disclose all material facts relevant to the transaction; failure to do so constitutes fraud. UCB's argument that reliance on counsel absolves it of responsibility is rejected, given that its actions from the 1962 amendment onward knowingly violated the rights of the plaintiffs as beneficiaries of the SFB Plan. The role of a professional trustee encompasses exercising judgment and fulfilling responsibilities, and exculpatory clauses in trust documents are interpreted strictly. UCB's claim that punitive damages were unwarranted due to a lack of demonstrable actual damage is dismissed, as timely disclosure would have allowed plaintiffs to protect their interests. Evidence showed that although the jury did not specify actual damages, it recognized that plaintiffs sustained damages. California law stipulates that punitive damages require a demonstration of actual damages, but the purpose of such damages is to deter wrongdoing, not just to remedy harm. Case law supports that punitive damages can be awarded even when actual damages are minimal or difficult to quantify, as seen in precedents where awards were made for acts of fraud or malice despite the absence of significant financial loss. In Esparza v. Specht, the California appellate court determined that a defrauded party only needs to demonstrate some form of damage, rather than a specific amount, to justify the recovery of punitive damages under Civil Code section 3294. The court in Topanga Corp. v. Gentile further clarified that exemplary damages can still be awarded even if the plaintiff does not receive compensatory damages, emphasizing that actual damages merely require proof of a tortious act for punitive damages to be assessed. In cases involving a breach of fiduciary duty, the necessity for proof of actual damages is significantly reduced. The precedent set in Menefee v. Oxnam illustrates that when a fiduciary misuses their position, the victim can seek relief regardless of actual injury. The courts prioritize protecting the rights of parties in fiduciary relationships, asserting that any breach of confidence, irrespective of tangible harm, warrants legal recourse. The legal standard maintains that the misconduct of a coadventurer in a joint venture must be addressed, focusing on the breach of trust rather than the presence of injury. The courts aim to prevent potential wrongs rather than remedy actual damages. Consequently, in the present case, the jury's finding of unspecified actual damages due to UCB's fraudulent concealment supports the awarding of punitive damages. UCB's argument regarding the excessiveness of punitive damages is dismissed, as their prior agreement allowed the jury to award punitive damages without a specified compensatory amount, waiving their right to contest the relationship between the two. The assessment of $550,000 in punitive damages against a corporate defendant with $8.97 billion in assets, who wrongfully diverted $762,000 in trust funds, is deemed reasonable. UCB challenges the trial court's award of $400,000 in attorney's fees, arguing it is excessive despite the court finding that plaintiffs' attorneys spent 1,398 hours on the case, resulting in a rate of $286 per hour. UCB references federal case law for guidance on attorney's fees, highlighting *National Ass'n. of Reg. Med. Prog. Inc. v. Weinberger*, where the court deemed $70 an appropriate hourly rate while awarding a 100% bonus for the attorney's effective representation in a complex class action. Similarly, in *Parker v. Matthews*, the court outlined factors influencing fee awards, including the complexity of issues, risk involved, results obtained, and the skill required, ultimately awarding rates of $60.35 and $30 to plaintiff’s attorneys along with a 25% incentive fee. California courts apply similar principles, as seen in *Serrano v. Priest*, where three equitable theories for attorney compensation were established: the "common fund" doctrine, the "substantial benefit" rule, and the "private attorney general" concept, with a focus on attorney time and value. The court emphasized that a trial court must meticulously assess the hours worked and reasonable hourly rates for each attorney before deciding to adjust attorney's fees based on factors such as the complexity of the case, the attorneys' skill, and the contingent nature of the fee. The trial court acknowledged that the plaintiffs' attorneys undertook their work at significant financial risk and displayed exceptional skill, resulting in substantial benefits for the plaintiffs totaling $1,312,000. However, the court noted that the $400,000 fee awarded appeared disproportionate to the hours logged, which exceeded 1,300 hours prior to a January 17, 1976 hearing. The court set future compensation rates at $100 per hour for partners and $60 for non-partners but indicated that these rates might not apply retroactively to pretrial and trial services. The trial judge may decide to assign a higher compensation rate for those services given their complexity. After determining an appropriate rate for the hours worked, the court can adjust the fee further if necessary. On appeal, the plaintiffs argued that the trial court should have set actual damages significantly above $1 and claimed it erred in its inability to compel UCB to increase their pensions. Plaintiffs assert that UCB's wrongful fund diversions hindered their ability to accurately assess damages, arguing that the trial court could have measured damages by the total amount of the diversions. They reference case law indicating that damages do not need to be "merely fanciful," and assert that evidence exists showing a hypothetical honest trustee would have raised their pensions by the amount of the diversions. However, their expert's testimony did not support this claim, as it only suggested it was feasible for UCB to increase pensions, without stating what an honest trustee would have done. Plaintiffs further contend the trial court should have compelled UCB to increase pensions based on an inferred intent from the original settlor of the SFB Plan, citing a provision allowing the pension committee to determine interest rates. They argue that the San Francisco Bank's past amendments to increase pensions imply a duty to do so. However, the court found no explicit requirement for UCB to increase benefits and noted that the SFB Plan was overfunded due to actuarial errors, with excess funds retained by UCB upon termination of the plan. Ultimately, the court upheld its decision that UCB acted wrongfully by diverting funds and appropriately ordered the restoration of those funds to the SFB Plan under Civil Code section 2237. The trial court determined it lacked authority to mandate an increase in plaintiffs' pension benefits from UCB. It found UCB acted knowingly and in violation of its trustee duties under the SFB Plan. The court viewed UCB’s actions, including concealment and diversion of funds, as a fraudulent scheme against the trust's beneficiaries, violating section 2234 of the Civil Code. This conduct warranted punitive damages due to its detrimental impact on beneficiaries. The court awarded nominal actual damages, reasoning that any amount beyond $1 would be speculative. However, the $400,000 attorney's fees awarded to plaintiffs were deemed unjustified, leading to a remand for reassessment. UCB's appeal of interlocutory orders was dismissed as nonappealable, and its argument against liability under section 1591 of the Financial Code was rejected; the court found that maintaining a pension fund benefits UCB's business operations. The judgment was affirmed in all respects except for the attorney's fees, which were reversed for redetermination. The trial court was also instructed to award reasonable attorney's fees for appellate services. Costs on appeal were awarded to the plaintiffs. A rehearing petition was denied, and a petition for a Supreme Court hearing was also denied.