Now that a judgment has been rendered against Allegiant Bank, the NPS litigation will move on to the appeal stage where the focus will be on R.S.Mo. Section 436.031.  The NPS trustees universally argued that this provision of the Missouri preneed statute relieved them of all responsibility and liability for investment supervision.  As set out in expert report of Professor Hanna, the trustees argued that the law prohibited them from participating in the investment advisor’s strategy and management of trust assets, and required them to follow investment instructions even though preneed funds were being sent to insurance companies with ties to NPS.  In support, the expert report references the 1994 Consent Judgment between NPS and the State of Missouri, and suggests that a reasonably prudent trustee would have determined that the court had approved the purchase of insurance policies from a related company.   While paragraph 6 of the Consent Judgment did obligate NPS to continue premium payments to Lincoln Memorial Life Insurance Company, Statesman National Life Insurance Company, and Memorial Service Life Insurance Company, other comments included in the Hanna expert report suggest that one or more of the NPS trustees were not even aware of the Consent Judgment.

There can be no argument that the trusts’ purchase of insurance from a commonly controlled company enabled the Cassitys to shift funds, first among policies, and then out of the insurance companies.   The SDR argued that the trustees opened the door to this fraud by allowing the trusts to purchase insurance from a related company, and then failing to monitor the cash surrender values of the policies.  The latter part of the SDR argument begs the question of who was in a better position to challenge the irregularities of Lincoln Memorial Life.   If intercompany fraud was a possibility that trustees should have foreseen, why did the Missouri Attorney General allow the continued purchase of Lincoln policies?

In resolving a long running dispute with NPS, the Missouri Attorney General’s office focused on getting NPS to timely fund the trusts.   Exploiting one of Chapter 436’s many ambiguities, NPS claimed it was not required to deposit consumer funds to trust until the contract was paid in full (a theory borrowed from Missouri’s endowed care law).    There is little discussion of Statesman National Life Insurance Company other than there was a reinsurance arrangement between it and Lincoln Memorial Life.   We are left to speculate whether Statesman’s role as original issuer of the policies issued to the NPS trusts was viewed as an element of independence that broke the line between NPS and Lincoln.  But, the Texas Department of Insurance’s records indicate that Statesman was put into liquidation in 1999, which was at a time when the Missouri Attorney General still had oversight of the NPS operations.  Was Lincoln then allowed to assume the Statesman policies issued to the NPS trusts?  It would seem to us that the State of Missouri put too much reliance on the Texas Department of Insurance to keep NPS and Lincoln on the straight and narrow.

For purposes of the civil trial, the Court cutoff any arguments that regulators should share in the fault for the NPS collapse.  So consequently, the defendants will ask the Federal Court of Appeals whether the trial court erred in its interpretation of R.S.Mo. Section 436.031.  Can the preneed trustee be relieved of all investment supervision?  If so, who then assumes the fiduciary duties for investment oversight?  Does the independent investment advisor become a fiduciary to preneed consumers?  Does the preneed seller also assume a fiduciary duty for the fund manager appointment?