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

As reported by the Memorial Business Journal*, the Illinois Funeral Directors Association has taken back the helm. For the past three years, the IFDA has been a floundering ship in risk of sinking. The master trust that paved the Association’s growth, has been threatening to bring it down. The IFDA took a crucial step to righting the ship when it relieved the ‘Calvert Group’ as plaintiff in the master trust lawsuits. IFDA leadership still faces several challenges to the Association’s survival, but taking charge of the master trust litigation was crucial. Now they must chart a course for resolution of the litigation. IFDA members will be asked to temper their expectations, and that may require an understanding of the master trust and how it crashed.

The Association built a massive master trust through the participation of hundreds of funeral homes from Chicago to Cairo. The program advisors sought to provide what members wanted: simple contract forms, contract data inputting, no risk investments, a consistent return, immediate payouts, and no tax statements. Those advisors also sought to provide the Association a growing source of revenue to support lobbying efforts, educational programs, conventions and even a museum. While all may have seemed good for twenty years, IFDA Services, as the trustee, was playing by its own set of rules. The architect who designed the master trust exploited a provision in the Illinois law that was intended to allow the small operator to avoid the costs of a corporate fiduciary.

In the absence of institutional oversight, the program was more akin to a defined benefits plan or a fraternal insurance company than a trust. The program architect ignored the fundamental fiduciary duties of the preneed trustee, and treated consumers’ payments as though they belonged to the Association. Having crossed that threshold, the program began purchasing an insurance product that would never have been a suitable investment for a preneed trust. The program has been flawed for many years, with many individuals contributing to its problems.

Many IFDA members are measuring their damages by the “values” reported by IFDA Service before the crash, and will not want to settle for less. But, the reason the Comptroller pulled the plug on the program was because, among other things, the master trust promised more than it could deliver.

 *Reprinted with permission from the July 21, 2011 issue of the Memorial Business Journal. To subscribe please call 609-815-8145.
 

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For a brief period, the Illinois Comptroller posted a notice that sidestepped the inquiries made by funeral directors about the application of their Merrill Lynch settlements. The OIC website has since be revised.

One of the inquiries to the OIC may have involved whether the settlement funds could be applied to the litigation costs for pending lawsuits against Merrill Lynch. But for the litigation brought against Merrill Lynch, the funeral homes would not have received the settlements paid by the Department of Insurance. However, the settlement funds fall far short of the actual damages suffered by the funeral homes and consumers, and the argument may be that a portion of the funds could be used to continue the litigation.

Specifically, the Comptroller’s answered as follows:

It is the position of the OIC that we do not have the authority to instruct industry members on the proper disbursement of the funds.

In the following paragraph, the Comptroller warns:

During the review of future annual reports and audits, we will examine the method in which the funds are handled to assure that industry members acted in a good faith manner and in the best interest of consumers when determining the disposition of the funds.

While the litigation argument has merit, the Comptroller probably had concerns about the other uses funeral homes may have for the settlement funds. The notice may seem evasive to the industry, but it did not necessarily foreclose the application of funds to litigation that may benefit the consumer. But, funeral homes should pay heed to the warning that they will be held accountable for how settlement funds for active contracts are applied.
 

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The Springfield Journal-Register reported last week on the latest lawsuit to hit Merrill Lynch, the IFDA and the law firm that represented the Association.

One aspect of the lawsuit focuses upon the claim that the key man insurance policies sold to the master trust were not suitable investments. Without an insurable interest, the policies could not provide the tax consequences sought for participating funeral homes. Piercing through the “it’s an insurance policy argument”, the allegations are directed at whether Merrill Lynch has violated securities laws. With the implication of securities laws, the Illinois Secretary of State’s jurisdiction has been triggered.

The article also reports on the lawsuit’s allegations against the law firm that represented the IFDA. Concerns over the investments date back to 1987 (which coincides with the issuance of Rev. Rul. 87-127), when the lawyers sought regulatory approval of the plan. While that approval was never provided, the IFDA moved forward, and the law firm is now being blamed for ‘giving the green light’.
 

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In rejecting the $18 million settlement forced upon IFDA members, an Illinois Circuit Court is telling Merrill Lynch Life Agency to dig deeper into its pocket to compensate funeral homes. As reported by the Springfield Journal-Register, the $18 million represents the revenues the insurance broker received from the sale of key man insurance to the IFDA master trust. Apparently, Merrill Lynch convinced the Illinois Department of Insurance (DOI) that the funeral homes’ damages should be measured in terms of the benefit that Merrill Lynch received. But as the editor of the Memorial Business Journal* suggests, the Circuit Court seems more inclined to consider a ‘deeper’ measure of damages, and that will require the parties to the litigation to assess the master trust’s true loss.

The master trust collapse is framed by a ‘value’ that was set by a fixed return (2%) on consumer deposits. Based on that ‘value’, the loss is reported to be close to $100 million. But, one question funeral directors may be forced to answer will be whether the trust could have attained that value with the investment restrictions imposed by the members and the expenses taken by the IFDA. Another issue that may be raised is whether the IFDA’s past executives and attorneys bear some of the responsibilities for either selecting the investments or approving them. If so, comparative negligence may force the IFDA to shoulder responsibility for a portion of the damages.

The situation begs for a negotiated settlement, and it is unfortunate that time and expense was wasted on an end run with a regulator that had little, if any, authority over the IFDA master trust.
 

*"Reprinted with permission from the March 4, 2010 issue of the Memorial Business Journal. To subscribe please call 609-815-8145."

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It didn't take long for an Illinois funeral director to confirm that IFDA members have disagreements with their association leadership. 

Several Illinois funeral homes filed a lawsuit in Cook County Circuit Court on January 28th.  The petition, a derivative complaint, seeks remedies and damages on behalf of all Illinois funeral homes that participated in the IFDA master trust.  Various IFDA officers, board members and agents are named the defendants.  The defendants include Merrill Lynch, in its capacities as an advisor to the IFDA. 

The Derivative Complaint asserts facts that indicate the IFDA not only concealed critical information, but mislead funeral directors and consumers.  However, the Complaint does not answer the question from my prior post:  Who is the seller of the IFDA preneed contracts?

Page 20 of the Complaint approaches the issue with a discussion of "Participating Member Firm Agreements", but ultimately sidesteps the question and its legal ramifications. 

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