In an opinion issued last week, the Eighth Circuit Court of Appeals struck down key NPS trial rulings that resulted in a $491 million jury verdict against PNC Bank (as the successor to Allegiant Bank).  The appeals opinion states that the trial court erred when it allowed the NPS receiver to argue tort based claims to a jury.  Instead, the NPS receiver should have been limited to arguing breach of trust claims to the judge.   The breach of trust claims would have substantially limited the bank’s exposure for the acts or omissions of other NPS trustees.  The opinion suggests that the most that Allegiant Bank could be held liable for was $66 million.  The judgment was remanded back to the trial court for additional trial proceedings.

In affirming two other key rulings, the opinion muddies the waters for preneed trustees.   Prior to its restatement  in 2009, Missouri’s Chapter 436 enabled the seller to use the trust agreement to define and limit the trustee’s duties.  And when the trust assets exceeded $250,000, the seller could also designate an independent fund manager and exculpate the trustee from liabilities arising from investments.  NPS exploited these Missouri law provisions to reduce the bank’s role to that of a custodian.  Allegiant Bank argued these issues as defenses, but the appeals court relied upon the restatement of trusts to hold that consumers and funeral homes are also beneficiaries of a preneed trust.  (Frankly, that holding should not come as a complete surprise to the funeral industry because the IRS came to the same conclusion in Rev. Rul. 87-127.)

When the beneficiary holding is coupled with the opinion’s discussion of the exculpation provisions of R.S.Mo. §436.031.2, preneed trustees have reason to be concerned.  The appeals court focuses on the following language from the statute:

“In no case shall control of said assets be divested from the trustee nor shall said assets be placed in any investment which would be beyond the authority of a reasonably prudent trustee to invest in.”

The opinion states that Allegiant Bank had an ongoing duty to monitor the prudence of investments, and cannot be relieved of liability unless it ensured that the fund manager was investing trust assets “within the authority of a reasonably prudent trustee”.   This is sure to be an issue regarding which PNC Bank will seek to introduce evidence.   NPS’ investment advisor was directing consumer funds to be invested in whole life insurance policies.  That was a common investment option following Rev. Rul. 87-127, and whole life insurance policies would seem to be within the authority of a reasonably prudent trustee.   Armed with 20/20 hindsight, the trial court could deem that the common control between NPS and the insurance company, and the ‘independence’ of the fund manager, required Allegiant Bank to drill deeper.  But how deep?

Preneed trustees that allow the appointment of independent fund managers will be monitoring the trial court’s handling of this issue.