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

It's always an ugly scene when a party to a fiduciary relationship gets caught with his/her hand in the cookie jar.  Unfortunately, this has been happening with alarming frequency in the death care community, and Indiana has had enough.  In a relationship that requires mutual cooperation, the death care industry has taken the position that "someone should have stopped us by saying no", and the Indiana legislators have agreed.   With the legislation signed into law last week, Indiana has initiated a major shift in the responsibilities of the death care fiduciary.  Like the tree falling in the forest, was there anyone from the banking/fiduciary community around to here it?

The Indiana legislature moved quickly in response to the trust frauds committed at Grandview Memorial Gardens and at the cemeteries owned by Robert and Debra Nelms, and Governor Daniels followed suit by signing HB 1026.  The new law will go into effect July 1, authorizing the Indiana State Board of Funeral and Cemetery Service to promulgate regulations that will determine the distribution documentation that must be reviewed and approved by death care fiduciaries.  Failure to comply with these new requirements will expose the fiduciary to criminal charges and liability to cemetery customers. 

 To understand the gravity of the issue, fiduciaries need not go any further than their clients for input.  The general counsel for the Indiana Cemetery Association put it this way:

The people who own the trusts could do almost what they wanted. We've given the trust companies the incentive not to pull the wool over their eyes.

Cemetery association members were aghast to learn of the case because they did not understand the extent that the current law left cemetery trusts vulnerable. People really weren't aware. 

It would be safe to say that most death care fiduciaries are still unaware how vulnerable these trusts are.

What should death care fiduciaries do?  The knee-jerk reaction would be to terminate such accounts and run as far away as possible.  However, the fraudulent character of the charges leveled in recent class-action suits bring into question whether the statute of limitations has even begun to run.  The class-action lawsuit brought on behalf of Grandview Memorial Gardens lot owners will likely turn on whether preneed contracts were performed pursuant to their terms, and that will require the distasteful act of opening gravespaces.  The trust frauds committed by the Nelms have already snared one fiduciary and a major brokerage firm when a $20 million class-action lawsuit was filed in late January on behalf of cemetery lot owners. 

Fiduciaries with a federal charter may be tempted to play the federal preemption card that has been used to keep state regulators at bay with regard to the sub prime mortgage crisis, but history is not on the national fiduciary's side with regard to death care regulation.  State death care regulators in Florida and Texas have taken OTS preemption opinions, rolled them up and slapped thrift chartered fiduciaries into submission.  Frankly, the legal arguments advanced by the state regulators were on point.

Indiana chartered fiduciaries need to become engaged in the procedures that will be unfolding before the Indiana State Board of Funeral and Cemetery Service later this Summer.  The death care industry will be there in force providing their comments about the forms and procedures to be covered by the regulations authorized by the new law.  Fiduciaries will have no one but themselves to blame if they miss this dance. 

Federally chartered fiduciaries will need to determine how significant a block of business Indiana represents to their death care business.  These fiduciaries will also need to monitor other states to see whether the Indiana law represents a trend that other state legislatures will follow. 

Death care companies and consumers will need to anticipate an increase in the cost of fiduciary services.   The old adage "you get what you pay for" has a double-edged application to the death care fiduciary environment.  The security sought by consumers and cemeteries/funeral homes will come at a cost.  To minimize the cost of the new obligation to provide distribution oversight, death care companies and fiduciaries will need to explore standardized examination procedures or the reliance on established audit procedures.   Death care companies will also have to be more receptive to trust instrument provisions intended to provide fiduciaries the power to say no, and protections when they do.

 

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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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