Death Care Compliance Law

Death Care Compliance Law

Preneed: A Pandora's Box of Problems

William Stalter is the founder of Stalter Legal Services and the Preneed Resource Company. Bill focuses his law practice on preneed and death care compliance, serving banks, funeral homes, crematories, and cemeteries. He has written multiple published articles

The Missouri Funeral Trust and its Catch-22

Posted in Compliance, Master Trusts, Missouri - SB1, Recordkeeping

A status hearing is scheduled for September 28th in the lawsuit filed by the Missouri Funeral Trust against the State Board of Embalmers and Funeral Directors and Catholic Fraternal Life.   The lawsuit is now 4 months removed from the request for a temporary restraining order that, among other relief sought, would stay the financial examination of one of Missouri’s largest preneed sellers.   Frustrated by an examination process that has lasted four years, the Missouri Funeral Trust has asserted that it is entitled to an injunction because of the lack of controls the State Board has over confidential information obtained through the preneed examination process.  But, the delay of the court in issuing a TRO does not bode well for the Missouri Funeral Trust.

This is the second lawsuit brought by the Missouri Funeral Trust to stem the State Board’s financial examination of the program’s books and records.  In 2013, the program sought an injunction and a declaratory judgment against the State Board with regard to letters being sent to MFT contract holders.   The State Board uses contract data provided by preneed sellers to generate letters that are sent to contract holders of accounts that are not paid in full.  The letter makes an inquiry to the contract holder whether their account information stated in the letter is accurate.  Referencing five such letters, the MFT cited the court to various problems with the consumer contact process.  However, those claims were eventually dismissed.

If the September 28th hearing results in a court order that sets a discovery schedule without the issuance of an injunction against the State Board, the speculation is that the Missouri Funeral Trust will dismiss the lawsuit rather than comply with the defendants’ discovery requests.   A court order that provides injunctive relief only against Catholic Fraternal Life puts the Missouri Funeral Trust in a precarious position.   The Missouri Funeral Trust has been fairly open in its challenges to State Board requests for documents and records, but the program cannot prove its case against Catholic Fraternal Life without disclosing the documents and information it claims to be confidential.    A Catch-22 of the MFT’s own making.

No Relief from the Federal Reserve: the September Announcement

Posted in Compliance, Guaranteed, Insurance Funded, Investments, Preneed

For an industry that has been dependent on interest income, the past 9 years have been tough on the death care industry.  Interest rates started to decline 9 years ago, with the bottom hitting in 2008.   Zero interest rates forced death care fiduciaries to diversify into equity investments, but trusts have experienced a sideways market for more than a year.  Some market watchers predicted that the market’s performance through May of this year signaled a rally that could prove a return to better days.  (Sideways Market – Breakout?) But, May has proven the year’s high point, and the markets have seen a significant slump since then.

There had been a glimmer of hope that the Federal Reserve would use its September meeting to announce the first rate hike since 2006, and the start of the return to normalcy for investment markets.  But, the Federal Reserve blinked, and the investment markets reacted negatively again.   This probably means a continuation of the sideways market through 2015, and possibly well into 2016.

One reaction from some funeral directors is that the 1% return of an insurance product is better than the uncertainty of a trust.  The various price protection programs offered by insurance companies that specialize in preneed policies suggest that many funeral directors disagree.

The investment markets are forcing the sources of preneed funding to become more creative, and complex.

Missouri’s Financial Examination Committee: What role?

Posted in Compliance, Exams/audits, Missouri - SB1

When the Missouri State Board of Embalmers and Funeral Directors meet this week, the role of the Board’s Financial Examination Committee will be discussed.  As established, the Financial Examination Committee was intended to expedite the exam process.  The initial Committee consisted of the Board’s public member and a former industry member who had previously acknowledged having limited experience with the different methods of funding preneed transactions.  That Committee makeup has resulted in some sellers encountering a prolonged review process that involved multiple exchanges with the Committee and the Board’s staff.   Our personal experience was that the Financial Examination committee would reiterate examiner conclusions without articulating the Board’s position and authority with regard to exceptions disputed by the seller.   Among the proposed regulations to be discussed by the Board is one that would revise the Financial Examination Committee.  We do not think the changes to the Committee go far enough.

When the legislature sought input in 2008 to re-write Missouri’s preneed law, there was discussion concerning the transfer of preneed supervision to the Missouri’s bank regulator.  We supported the Board’s continued supervision of preneed transactions because of the complexity of the transaction.   An industry board would have far greater experience with the three methods of funding.   However, that intent is being circumvented with seller disputes are retained by the Committee rather than being referred to the full Board for consideration.

The Committee does serve an important role in reducing the Board’s workload.  However, the Committee’s interpretation of SB1 cannot be substituted for that of the full Board.  If a seller disputes the interpretation of a statute as applied by the examiner, and the Committee, then the issue should be referred to the Board.  The Board should determine if the seller need to be summoned to a meeting to explain the issue.   The referral of the issue should be accompanied with notice to the seller with an explanation of the Committee’s position and legal authority.  Accordingly, we would revise the proposed regulation pursuant to the attached.

Missouri’s Next Round of Preneed Examinations: Drilling Deeper?

Posted in Compliance, Exams/audits, Missouri - SB1

When the Missouri State Board of Embalmers and Funeral Directors meets this week, their staff will be seeking input regarding the scope of the second round of preneed audits.  Each preneed seller is to be audited at least once every five years, and the first round of audits was ‘concluded’ this year.   Included on the meeting agenda is the staff’s proposed scope of the financial examinations.  The staff had previously acknowledged that the first audit would focus on each seller’s contracts and recordkeeping.   Now that each seller’s contracts and records have been review, where should the next audit focus?

Obviously, some sellers had/have recordkeeping problems, and the next audit will need to determine if progress has been made to correct their problems.  But, we would question whether 100% of all contracts need to be reviewed if a seller’s first examination found the recordkeeping and contract forms to be in compliance.   A sampling review of the ‘new’ contracts would suffice for sellers with compliant recordkeeping.  But even for a seller with deficient recordkeeping, the examination may need to focus more on the method for booking contracts, payments and distributions.

Similarly, the examination process could use a sampling approach with regard to consumer contacts.   A seller’s first examination included a letter to each consumer that was not shown as having a paid in full arrangement.  Instead, a sampling of consumer letters could be sent.  However, that sampling should also incorporate current contract data.  The use of stale contract data by the Board’s examiners led to consumer confusion, and seller frustration.

But, the more important shift in the examination scope could be the inclusion of procedures to test the seller’s death claims.  One criticism made of the examination process by Missouri funeral directors was that it would be impossible for auditors to find the ‘hidden drawer’.   In other words, it is very difficult to find the funeral director that hides his unfunded contracts.  There is truth to that statement.  But a review of the seller’s statements of goods and services can lead an examiner to irregularities that could be a flag for fraud.  (Why did you provide these funerals without seeking payment from the family?)

The MFT Lawsuit Claims: The Client List

Posted in Associations, Master Trusts, Missouri - SB1, Preneed

The lawsuit brought by the Missouri Funeral Trust against the Missouri State Board of Embalmers and Funeral Directors and CFL Pre-Need includes  a number of unique and dubious claims.  For example, the lawsuit defines CFL Pre-Need, an insurance company, as a competitor but not funeral home clients that are licensed as a preneed seller.  The lawsuit also claims that CFL Pre-Need would not, but for information obtained through the auditor, be able to steal away clients.   With information obtained through the audit, the MFT also asserts that CFL Pre-Need can engage in price fixing, cutthroat pricing, and other improper pricing activities on various products and services.   We will examine these allegations in future posts, but for this article we will examine the crux of the MFT lawsuit: its customer list (the provider funeral homes) is a trade secret.

While the lawsuit assets claims that fall under the Missouri Uniform Trade Secret Act, the petition never cites the court to Chapter 417.  That may reflect the plaintiff’s recognition that the Missouri courts have yet to treat a customer list as a protectable trade secret under the Act.  That’s not to say a customer list could not be a trade secret, but as a recent Armstrong Teasdale’s Employment Law Letter explains, the party seeking to establish a customer list as a trade secret has to pass a six factor test.  The last element of that test may prove very difficult for the MFT to satisfy:  the ease or difficulty with which the information could be properly acquired or duplicated by others.

A company like CFL Pre-Need has a finite population of possible Missouri funeral home clients.  Not being licensed as a preneed seller, the company can only market its insurance through funeral homes that have a preneed seller’s license.   A list of those funeral homes can be downloaded from the website of the Division of Professional Registration.   To determine whether a funeral home is also a MFT client, one merely needs to visit the funeral home’s website.   It would seem that the MFT has a formidable challenge to establishing its customer list as a trade secret.

If the MFT cannot establish its funeral home client list as a trade secret, it then has the unenviable task of proving that its investment performance, administrative charges, investment contracts and program documents are trade secrets under the Uniform Trade Secrets Act.

Missouri Preneed Tax Cut: The Contract Fee

Posted in Missouri - SB1, Uncategorized

Saving Money Credit 2

Using its emergency rulemaking authority, the Missouri State Board of Embalmers and Funeral Directors reduced the state preneed contract fee from $36 to $25.  The change is to go in effect on September 1, 2015, the first day of the next reporting period.

The High Cost of Litigation: Copy Charges

Posted in NPS/Lincoln

The Special Deputy Receiver for National Prearranged Services recently filed a Bill of Costs with the Federal trial court.  The Bill of Costs seeks to recover copy charges of more than $500,000 from a former NPS trustee.  Those costs do not include attorneys’ fees.  Litigation can be very costly.

Missouri’s preneed regulators are keenly aware of the costs of the NPS lawsuit, and accordingly, have been challenging the Missouri Funeral Trust regarding how it is financing its lawsuit against the Missouri State Board of Embalmers and Funeral Directors.  In pleadings filed with the Circuit Court, the State has sought confirmation that the MFT is not using consumers’ trust funds.  The program’s executive director stoked that issue at a recent State Board meeting when he advised that the program trustee should not be required to disclose whether attorneys’ fees are being paid from the trust.  As a defense to that statement, the executive director advised that preneed purchasers do not have a right to trust income on the cancellation of a contract.  That statement ignores the Chapter 436 provisions that allow a purchaser to name an alternative provider and transfer their trust.  The statement also ignores whether the funeral home providers have a right to a disclosure by the trustee of the payment of attorneys’ fees, and how those fees are being allocated.   More appropriately, the MFT trustee would owe provider funeral homes an explanation of why litigation expenditures are necessary and in beneficiaries’ best interests.

Trustee Investment Liability: The Preneed Purchaser Wild Card

Posted in Associations, Fiduciary, Investments

Back in March, the NPS Special Deputy Receiver won a judgement of $355 million against PNC Bank (as successor to Allegiant Bank).   In defense of Allegiant Bank, PNC argued that Missouri’s Chapter 436 defined the trustee’s duties as owed solely to the preneed seller.  That was the intent of the Missouri Funeral Directors Association when it sponsored the 1982 legislation that was to become Chapter 436.  The MFDA wanted to establish a master trust program that could control investment functions and limit the trustee’s duties.  Watching what other state associations were doing, the MFDA went a step further by having the law define a new legal entity: the third party seller.  In contrast to the agency relationship followed by other states’ preneed programs, Missouri wanted a program where an entity other than the funeral provider could be the principal, and in control of the preneed trust.

But, the Federal court disagreed with PNC and instead interpreted Chapter 436 to find that funeral home providers and contract purchasers were also beneficiaries to the preneed trust, and thus owed fiduciary duties.  That ruling cut the legs out from under PNC Bank, and the jury quickly awarded a judgment in favor of the SDR.  In a recent pleading filed with the Federal trial court, the SDR is now requesting $179 million of prejudgment interest from PNC Bank.  The total tab sought by the SDR against the former NPS trustee is now in the neighborhood of $570 million.  So, it is perplexing to witness Missouri’s last active third party seller continue to deny the impact of the NPS decision and a new preneed statute on the duties owed by its program trustee to funeral homes and contract purchasers.

At this past week’s State Board meeting, the executive director of the Missouri Funeral Directors and Embalmers Association and the Missouri Funeral Trust spoke in opposition to Chapter 436 legislation that refers to provider funeral homes and preneed contract purchasers as beneficiaries to the preneed trust.  The executive director offered isolated provisions from the new Missouri preneed law in argument that purchasers have no rights to trust income, and therefore, no rights to trustee disclosures.   It was not clear from the executive director’s comments whether either the Association or the Missouri Funeral Trust have a position on the provider funeral homes as trust beneficiaries, and thus entitled to trustee disclosures.

Clearly, one issue that troubles the MFT is the extent that Eagle Bank (the program trustee) and its fund managers owe a duty to preneed contract purchasers for investments.  Sponsors of master preneed trust programs often limit their trustee’s investment exposure by offering investment options to the funeral home.  If the preneed purchaser is excluded from that process, can they then sue the trustee, investment advisor and funeral home provider if the account loses value?  That is what happened in Illinois.  If the program includes the preneed purchaser in the process (by contract provision consenting to the funeral home’s decision), will a court find that binding on the purchaser when the program limits the funeral home’s investment options?

By challenging legislation because it acknowledges the purchaser as a trust beneficiary, the Missouri association has become that proverbial ostrich with its head into the sand.  The NPS trial ruling has thrust Missouri preneed trustees into a dilemma whether the association will admit it or not.

Trust Shortages: Sponsorship Fees

Posted in Associations, Master Trusts, Missouri - SB1

It was been almost 7 years since we posted the piece titled “Trade Association Membership: weighing the costs vs. the benefits”.   Towards the end of that article, we discuss how the master trust sponsor fee provides a crucial source of revenue to state associations.  That post was written subsequent to the dissolution of the Minnesota master trust but prior to the lawsuits filed against the Illinois, California and Wisconsin master trusts.  Through those subsequent lawsuits, we learned that each association assessed sponsorship fees against their respective master trust that was labeled abusive.  Settlements of the lawsuits divested trust control away from each association.  We continue to assert that the state association should be allowed to charge a reasonable sponsorship fee, but would repeat the suggestion made in our original post:

Association leadership must also be careful that the master trust does not become a source of dissatisfaction when earnings and/or expense expectations are not met. Disclosures, accountability, frequent communications, innovation and leadership will be crucial to retaining membership satisfaction.

Missouri Audits: What’s in store for round 2?

Posted in Compliance, Exams/audits, Missouri - SB1

The Missouri State Board of Embalmers and Funeral Directors will meet August 4th and 5th to discuss legislation, regulation drafts and changes to the examination process.  The State Board examiners are completing the first audit of each preneed seller, and the scope and procedures for the next round of preneed audits will be discussed.   Use the following hyperlink to down load the State Board Open Agenda Material.