The Office of the Comptroller of the Currency (the OCC) supervises the fiduciary activities of national chartered banks, and in February, updated the guidelines used by its examiners.  The “Personal Fiduciary Activities” booklet includes a section on pre-acceptance due diligence that fiduciaries should conduct before agreeing to serve as trustee for an account.  Page 7 of the attached excerpt describes due diligence procedures banks should incorporate into their policies.  The Special Deputy Receiver has argue that the NPS trustees failed to perform sufficient pre-acceptance due diligence before accepting those accounts, and therefore breached this duty to the preneed consumers and funeral homes.  The expert report of Professor Hanna suggests that the SDR’s arguments include that the banks were too small to handle a preneed trust, did not understand the requirements of Chapter 436, and did not discover either Doug Cassity’s fraud conviction or the Consent Decree between NPS and the State of Missouri.

Too Small to Play

A fiduciary can breach its duties to a trust beneficiary if it accepts an account for which it lacks the resources or personnel to properly administer the account.  The fiduciary must be able to assess its own capabilities to handle the account.  The pleadings suggest that the SDR has attempted to prove that NPR targeted smaller banks with promises to keep the administration simple and to give the bank an opportunity to win all of NPS’ banking business.

Failure to Comprehend

With special purpose trusts, the fiduciary has a duty to familiarize itself with all applicable state laws and determine its ability to comply with those laws.  The SDR has asserted that a crucial error committed by the defendant trustees in 1989 demonstrated their failure to understand Chapter 436.  Before accepting the NPS trusts, one trustee eliminated from the trust agreement the requirement that NPS provide individual account data.  NPS moved the trusts from UMB Bank when that trusee threatened to cutoff income distributions when such data was not forthcoming.  Subsequent trustees did not require individual contract data, and instead relied upon NPS instructions regarding distributions.

Don’t Get in Bed with the Devil

The OCC guidelines state that a fiduciary has a duty to investigate the trust and its assets.  The SDR has asserted that the trustees also had a duty to investigate the preneed seller, which would have disclosed the Cassity conviction and the NPS Consent Decree.   If such due diligence had been performed, the trustees would either have refused to accept the trust or implemented additional safeguards.

Of these three arguments, the failure to comprehend Chapter 436 carries the greatest weight with this author.  While a small trust department may lack personnel and programming to provide investment or compliance services, those functions can be delegated.  The OCC guidelines recognize that a fiduciary may even have a duty to delegate functions when it lacks the necessary expertise.  That can be true even for the largest trust operations.  A trust department is more likely to breach a duty when it fails to comprehend what is required by applicable law that bank officers do not regularly interpret.

With respect to not getting in bed with the devil, the OCC guidelines do warn banks regarding reputation risk when agreeing to accept preneed funeral business.  However, OCC guidelines focus due diligence efforts on trust assets and administrative procedures, not so much on the trustor or an undisclosed party with ownership interests in the trustor.