Death Care Law Blog : Kansas Death Care and Preneed Lawyer & Attorney : Stalter Legal Services Law Firm : Funeral Law, Elder Law : Kansas City

In relation to many of its peers, Springfield’s Oak Ridge Cemetery could be labeled progressive. Oak Ridge maintains both an endowed care trust and a preneed trust. In contrast, a substantial number of the country’s cemeteries have neither. The fact that Oak Ridge Cemetery is owned and operated by the City of Springfield, Illinois, makes the cemetery even more remarkable. Few municipal cemeteries have such funds, and instead, must be subsidized by taxpayers for operating funds. Despite the foresight of Oak Ridge’s board of directors, the cemetery has had to resort to “netting” the past few years to make ends meet. They have done so to the tune of almost a million dollars, and Springfield’s Mayor is being advised that drastic action is necessary.

The Mayor’s attorney blames Oak Ridge’s board of directors for bad investments and netting deposits, and recommends that the control of the cemetery be changed. With the increase in cremations (and the decline in burials), the Oak Ridge board failed to adapt, and instead, spent the funds that should have been contributed to the trusts. To make up for the decline in trust contributions, the board took more risks with trust investments, which exposed the trusts to the market declines of 2008. The combination of netting consumer payments and investment declines put Oak Ridge in a deep hole. And now, the Mayor’s attorney thinks it’s time for a change in management, and for the cemetery to start living within its means. Sounds like sage advice, but it’s not very practical.

Turning Oak Ridge over to the city’s park and recreational department will only ensure a decline in the cemetery’s operations. While the cemetery’s board may be guilty of staying with their old business plan too long, those individuals are more familiar with the operation of a cemetery than those city employees who oversee Springfield’s parks.

Regarding ‘bad’ investments, the Mayor’s attorney suggests the cemetery board should have stayed conservative. The problem with that advice is that the 2008 market crash hit mortgage-backed securities the hardest, which happens to be the ‘bread and butter’ of most cemetery trust funds. The fact is that most cemetery trusts may be too heavily invested in fixed income, and the need is to diversify their investments (as opposed to ‘going conservative’). (In that the Mayor’s attorney is the same individual who defended the IFDA master trust’s investment in key man insurance, this criticism rings a little hollow.)

While Springfield needs to make the Oak Ridge board more accountable, those members should be given the opportunity to develop a new business plan for the cemetery. The decline in traditional burials is inevitable, and cemeteries must plan accordingly. While the costs of the traditional funeral and burial are a leading factor to the rise in cremations, cemeteries need to evaluate the prices charged for their interment rights and services. They also need to evaluate the need for marketing. One such opportunity is to market to the consumer who has already chosen cremation. Another opportunity is to form marketing alliances with funeral homes.

Or, the Mayor could pull in the reigns and allow the taxpayer to foot the bill.
 

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When news of the indictment of 6 National Prearranged Service officers was reported last November, many newspapers picked up the AP version that included a quote from the Internal Revenue Service criminal investigator. The fact is that the Federal investigation of NPS involves investigators from the IRS, the FBI and the U.S. Postal Inspection Service. An FBI press release regarding the NPS indictments includes comments from investigators with the three Federal agencies. To understand how NPS’ actions triggered the jurisdiction of the three agencies, a 2009 FBI press release concerning the indictment of Randall Sutton provides an explanation of the underlying facts.

The main thrust of the IRS investigation will be to determine whether the NPS officers committed income tax evasion with regard to what they individually received, or with regard to what the company received. The investigation will need to determine how the distributions from insurance, and from trusts, should have been reported by NPS. The investigation will also need to examine how NPS’ sister corporation, Lincoln Memorial Life, reported its income. And, the investigation will look at how the preneed trusts controlled by NPS reported their income.

Shortly after the Federal investigation of NPS was initiated, the Springfield Journal-Register reported that a Federal investigation of the Illinois Funeral Directors Association master trust had been initiated. As with NPS, Federal investigators will look closely at whether the reports mailed to funeral homes, and the statements mailed to consumers, were fraudulent, and thereby, violated mail fraud statutes. However, another line of investigation will be whether the master trust violated the Federal tax code.

What does the IRS’ role in these investigations mean to funeral homes and consumers? If these entities failed to accurately report income, the IRS (and state authorities) will view the unreported income as lost revenue to government. Preneed trust income must either be reported to the consumer or taxed by the trust. NPS trusts may have had annual tax liabilities in the tens of millions of dollars. No small potatoes considering the plight state coffers currently face.

Consequently, consumers and funeral homes may see taxing authorities become more aggressive in the enforcement of preneed income reporting requirements. With fewer agents due to budget constraints, the IRS may begin promoting its whistleblower program. If the situation reported this past weekend is an indicator of the future, non-compliant preneed companies may have more to fear from the disgruntled employee than being selected for a random audit by the IRS or state department of revenue.
 

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Maybe it’s a response to shrinking state budgets, or the fact that the tracking of preneed funds is becoming more effective, but state and local prosecutors are assuming an expanding role in the enforcement of preneed laws.

While a recent report released by the Missouri State Board of Embalmers and Funeral Directors reflects a drop in the number of preneed complaints that it handled in 2010 (44 complaints after a spike in 187 complaints in 2008 and 127 complaints in 2009), the Missouri Attorney General’s Office reports having handled 887 preneed complaints in 2010. One of those complaints ended with a former Butler, Missouri funeral operator being sentenced to seven years in prison.

As previously reported in this blog, the new Illinois Comptroller responded very quickly to a preneed complaint by referring a funeral home to the State Attorney’s office for prosecution. In 2009, the Kansas cemetery regulator worked with local prosecutors when a Hutchinson cemetery acknowledged that funds were missing from both a preneed trust and a permanent maintenance trust.

Here in the Midwest, a death care operator could go years without an audit. While some states required some form of preneed reporting, there was little evidence those reports were being reviewed. Consequently, the operator who may have had trouble making payroll had little fear of prosecution so long as the preneed contracts were being serviced. That is changing.

Illinois, Missouri, Kansas and Nebraska have implemented (or will implement) new reporting requirements (and in some cases, audits). If trusts are found to be deficient or empty, regulators seem to be more willing to turn the matter over to a prosecutor who has a vested interest in protecting voters with an empty preneed account.
 

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In the end, Clayton will likely spend many of his final days in a federal penitentiary. The Memphis Commercial Appeal outlines the plea bargain to be entered by Clayton Smart to conclude criminal investigations in Tennessee, Oklahoma and Michigan.

Comments made to the Commercial Appeal story express outrage with the prosecutors and the plea bargain. Consumers will not be made whole, nor will Mr. Smart be summarily executed.

The costs of the Smart investigation and prosecution have to be staggering. The transactions span three states, multiple state regulatory jurisdictions and various local and Federal prosecutors. With the prospect of securing testimony against all of those who abetted Mr. Smart, prosecutors have moved to bring the matters to faster conclusion.

It is unlikely that three different courts will agree that Mr. Smart’s 4 years at 201 Poplar has paid his debt to society. His cooperation will count for something, but the harm to consumers can’t be ignored.  

With budgets in decline, regulatory agencies and prosecutors need to find the means to work together when the facts indicate fraud or theft have occurred.  The preneed regulator will be the first to suspect something is wrong, but in the end, may lack the resources to press for prosecution.   Prosecutors may lack the facts and knowledge of the preneed law to determine whether a crime has been committed.  Better coordination between regulators and local prosecutors is needed.
 

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At age 78, Darrell Bennett should be spending his days on a Florida golf course. Instead, he is back in Michigan trying to salvage his life’s work. Like so many funeral home owners, Mr. Bennett handed over the keys to someone he trusted and took back a note for the purchase price. According to stories published by the MonroeNews and Fox News in Toledo, Brad Prochnow not only failed to make good on Mr. Bennett’s note, he also kept preneed payments made by consumers.

With rising cremation rates, preneed funding failures, and the allure of retirement, a growing number of funeral home owners are thinking about an exit strategy. The decline in funeral home profitability will require more of a plan than taking back a note.

Mr. Bennett hopes that the industry will learn from his experience and take steps to better safeguard consumers’ preneed funds. Another lesson to be learned is that a proper succession/exit strategy involves planning, financial analysis and due diligence. Hiring a consultant or an accounting firm may seem an unnecessary expense, but a view of Mr. Bennett’s interview would suggest otherwise (youtube).
 

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Families and funeral homes harmed by NPS will hope that company’s owners and officers have to face a judge like the Honorable Richard Rome.

The Hutchinson News reported that District Judge Richard Rome rejected a plea bargain for probation, and sentenced Fairlawn Burial Park’s owner to almost 5 years in prison. A Kansas Secretary of State audit of Fairlawn’s permanent maintenance trust and preneed merchandise trust found several hundreds of thousands of dollars missing. The owner’s attorney suggested the funds were used to keep the cemetery operating.

While prosecutors negotiated a deal to replenish the trusts, the judge disregarded the plea bargain and sentenced Ms. McDonough to prison. The message to operators is that if the cemetery needs funds for operations, don’t borrow them from the trusts.
 

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Forest Hills’ preneed consumers were hoping for news of retribution, but Clayton Smart’s anticipated plea bargain was put on hold. If news reports are accurate, authorities from Tennessee (and perhaps Michigan and Indiana) have their sites on the individual(s) who facilitated the transactions that eventually left preneed trusts and permanent maintenance trusts depleted.

For the past few years, Mr. Smart has sat in jail while authorities built their cases. Until recently, Mr. Smart had not even employed an attorney. In what may be tipping his hand, Smart’s attorney now suggests his client has paid a steep price through incarceration. If Forest Hills consumers had their way, Mr. Smart would be condemned to a much warmer, and eternal, confinement.

It is most likely that Mr. Smart has been making his deal through testimony given, and to be given, with respect to his transactions in Michigan and Tennessee. Mr. Smart’s Michigan caper has been detailed by the Detroit Business Journal in an article titled The Grave Robbers. CNNMoney has also chronicled the story.

By these accounts, Mr. Smart had no prior experience in either the funeral business or the cemetery business. Yet, with the help of ‘sophisticated financial advisors’, a self-promoting speculator exploited the laws meant to protect the consumers of both industries.

The Tennessee authorities cannot possibly make the Forest Hill consumers whole. When Smart took control of the Forest Hill preneed trust funds, its insurance investments were surrendered at substantial losses. Smart’s advisors wanted to put the money to better use. Consequently, the authorities need to make an example of Mr. Smart, and his friends. 

Those victimized by NPS (and the IFDA?) are hoping for some of the same justice. However, the issue of justice in Missouri is complicated by rumors of complicity between the preneed company and some of its industry members.
 

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Death care regulators seem to believe that the majority of funeral home and cemetery operators are honest and well intended.  But, the regulators must contend with the occasional operator who views trust funds as their own.  Before taking offense with the regulator's skepticism, operators need to reflect on the arrogance of operators such as those reflected in a recent Kansas news article. 

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Over the past few years, preneed frauds have been measured in terms of hundreds of millions (with the suggestion that the NPS loss will top a billion).  And, funeral directors and consumers have been frustrated by the perception that regulators are helpless to stop preneed fraud.  Apparently, one local prosecutor from Texas took notice.

When the Texas preneed regulator and Attorney General failed to address an $8,000 fraud, the Galveston County prosecutor obtained a grand jury indictment against a Texas funeral director for the misappropriation of preneed funds.  Generally, the prosecution of preneed fraud falls to the death care regulator and/or the state attorney general.  Realizing that state coffers may be lean for years to come, legislatures such as Missouri's are granting local prosecutors concurrent jurisdiction to prosecute preneed law violations. 

The prospect of prosecution by a district attorney with no prior experience interpreting an ambiguous preneed statute was sufficient reason for funeral directors to oppose legislation that authorized concurrent jurisdiction.  However, circumstances such as those in Missouri and Illinois have opened the door for comprehensive reform legislation, and concurrent jurisdiction. 

When the attorney general may lack the resources to prosecute an $8,000 preneed fraud, the local prosecutor, looking to make a name for himself/herself, can initiate a prosecution of the wayward funeral director by using statutes such as Missouri's Chapter 436. 

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Funeral directors will attempt to leverage the Funeral Service Insider’s report about the NPS contributions to state politicians, but they should do so with caution.

The story does not paint the entire picture of NPS’ efforts to influence the politics that controlled Missouri’s preneed industry. The amount attributed to the Missouri efforts ($168,000) seems low. Granted it does not reflect contributions made during the past two years, or those made prior to 1999, but the seven years in question cover the period when NPS’ sales seemed to have leaped (within Missouri and to other states). 

If NPS providers are going to point an accusing finger at Jay Nixon, they need to consider two issues: their need for Nixon’s help and cooperation, and the complicity of some funeral directors in the NPS impropriety. 

NPS made political contributions for a number of reasons, including the opportunity to have NPS providers appointed to the Missouri State Board of Embalmers and Funeral Directors. The funeral homes demanding action from the regulators may, for the most part, be innocent.  But when a group is found to have one or more pots calling the kettle black, the credibility of the group as a whole is undermined.

If it is not apparent, there is some finger pointing being done within the regulators’ closed circle. A potential issue in the rift among the regulators maybe the political dispute between Missouri Governor Matt Blunt and Missouri Attorney General Jay Nixon that prompted the AG’s Office to pull its staff attorneys from their day to day representation of the various state boards and agencies. This forced the Missouri State Board of Embalmers and Funeral Directors to look to the legal staff of the Division of Professional Registration, a staff that was already stretched. In reality, the NPS situation existed long before the AG pulled its attorneys, and the posturing has already begun for that issue.  

The NPS meltdown has regulators scrambling for their respective excuses. Some of those excuses will appropriately lay the blame back on the death care industry. However, NPS was an equal opportunist when it came to exploiting politicians and funeral directors. Eventually many individuals may be called upon to provide an explanation, but funeral directors and regulators would be better served channeling their current energies towards the recovery of consumers’ funds and the formulation of a program to administer those funds.  

In five months, consumers will be voting.  Will they be more receptive to excuses or explanations about the efforts already implemented to provide their funerals?

Everyone has an excuse. Write them down and put them away for another day.  

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The families of those buried at Grandview Memorial Gardens are angry.  First they are advised that the trusts meant to fund future burials and the care for those graves are not properly funded. Next, they learn that some of the cemetery’s gardens have a problem with grave spaces flooding with water. When Indiana regulators and prosecutors reported there was nothing they could do to correct the situation, plaintiff attorneys filed a class action suit naming several entities as defendants, including three banks and the consolidator that sold the cemetery in 2001. The Indiana legislature has also reacted to the situation with a bill intended to eliminate the ability of the death care industry to use a custodial arrangement for these funds, and to place a greater burden on fiduciaries to police fund distributions. 

Are Grandview’s problems the fault of the three banks named as defendants in the lawsuit?  Of course not.  Should the preneed fiduciary be required to police distributions to the extent required to determine if the vault delivered is a 'sealer' or not?  Of course not.  The Grandview situation may be more indicative of the problems facing the death care industry than the irregularities facing the Illinois Funeral Directors master trust.  There are several factors that have contributed to the Grandview situation. Consequently, there are no simple answers, and shifting the blame/responsibility to the financial institutions that serve the death care industry is short sighted and counterproductive. 

Indiana’s death care laws are a hodge-podge of sections spread among different chapters, with different effective dates. If funeral directors and cemeterians cannot accurately cite the legal requirements for their trust funds, should legislators pass the responsibilities over to the financial institutions? 

It doesn’t take much speculation to guess why Indiana’s regulators have not taken any actions. More than likely, the Grandview accounts complied with the Indiana laws (albeit they were likely set up as custodial accounts). This won’t stop the class action attorneys from pursuing the deeper pockets of the banks and Carriage. 

If the death care industry should decide to take steps to improve the image of preneed and perpetual care, death care fiduciaries have to be afforded the resources and procedures required to provide meaningful oversight to account distributions. Fiduciaries are completely dependent upon the death care company for the documentation required for substantiating distributions. Many fiduciaries rely upon certifications from the death care company that a contract has been performed pursuant to its terms. But such procedures cannot ensure that a family receives a ‘sealer’ vault, if that is what the preneed contract called for.  HB 1026 will not solve Indiana’s preneed woes. The problem is deeper than the water that filled Grandview’s vaults. 

The approach taken by Grandview’s class action attorneys reminds me of the search for the infamous Keyser Söze.  As if they were reading from the script for The Usual Suspects, the attorneys advise they think they have it figured out but that legal process will have to grind out justice slowly.  For the sake of the Grandview families, we hope there will be a different ending than what happened in the movie. In real life, there is no Keyser Söze to whom all blame can be attributed.  Instead there are only some bit players who followed the twisting trail of Indiana law, and the only characters likely to profit from this drama are the attorneys. 

To help the Grandview families, the first course of action needs to be the repair of the cemetery’s drainage system. If the cemetery’s perpetual care fund was depleted through improper distributions, determine who did so. There has been little press coverage about the prior owner’s response to the perpetual care issues. Did Madison Funeral Services understand the requirements of cemetery maintenance when it purchased Grandview from Carriage in 2001?   Did the more stringent perpetual care law govern Grandview’s fund?   How much of a perpetual care fund did Madison receive from Carriage? 

With regard to whether the Grandview families were defrauded with inferior vaults, what did the preneed contracts provide? If one reads between the lines, the Jefferson County Prosecutors are indicating there is no basis for a fraud prosecution. The statute of limitations excuse sound like, ah, an excuse.  Doesn’t the statute of limitations start from the point of the discovery of the fraud? If consumers were promised a ‘sealer’ vault, and an investigation does not prove the fraud for 8 years, has the statute of limitations just been triggered? The danger for the Grandview families is that the contracts don’t call for a ‘sealer’ vault. Someone may have planted the ‘sealer’ seed in their minds, and we should hope it wasn’t someone looking to profit from the families’ emotional distress.

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