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.