PNC Bank has been hit with $15 million of punitive damages because Allegiant Bank did not know its client.

Before opening a fiduciary account, banks are required to perform due diligence on the trust’s grantor and on the trust’s purposes.   Such due diligence is referred to as ‘know your client’ or “KYC”.  KYC requirements had been in the works prior to 9/11, but the terrorist attacks provided the political momentum needed to pass the Patriot Act.  For preneed trusts, the Office of the Comptroller of the Currency had issued due diligence guidelines in April 2000.  The OCC memorandum warned that preneed trusts posed unique risks to banks, and that a preneed trust should be accepted only after due diligence reviews of the funeral company and the applicable state preneed laws.

In a March 2015 post (NPS Trustees: Pre-acceptance Due Diligence), we discussed the legal arguments made that Allegiant Bank had breach its fiduciary duty by accepting the NPS trusts without adequate due diligence of NPS and Chapter 436.  Although we did not know the facts and circumstances of Allegiant Bank coming to be the NPS trustee, one SDR argument carried the most weight: Allegiant Bank failed to properly comprehend Chapter 436.  Four years late, the Trial Court cites that argument as its basis for awarding punitive damages.

We learn through the Judgment’s Finding of Facts that Allegiant Bank courted NPS with a list of hand written questions prepared by Herbert Morisse, the bank’s only trust officer.  While Mr. Morisse had 17 years’ experience as an estate planning attorney, he only had 2 and half years’ experience in administering trusts.  The NPS trusts would represent the first preneed trusts under his supervision.  (See Pages 17 through 22 of the Judgment.)  Despite his lack of experience with Missouri’s preneed law, Mr. Morisse did not seek assistance from Allegiant Bank’s outside legal counsel.  Instead, Mr. Morisse sought to ‘familiarized himself’ with the Missouri law and define the due diligence to be conducted.

The Court found Mr. Morisse made several critical erroneous interpretations of Chapter 436, the Missouri preneed law.  Mr. Morisse failed to recognize that NPS associate funeral homes and individual preneed contract purchasers were beneficiaries to the NPS trusts.  Mr. Morisse also erroneously applied the Missouri law to allow the income distributions from the NPS trusts.  But worse of all, Mr. Morisse interpreted Section 436.031 to hold the preneed trustee harmless from any investment made by an outside investment advisor.

In a discussion starting on Page 284, the Court states that the decision is not about the vilification of Mr. Morisse, but rather an indictment of the institutional failure of Allegiant Bank to understand the requirements of a Missouri preneed trust.

As discussed in our 2015 post, the OCC’s preneed trust guidelines have been modified since April 2000, and are now part of the Personal Fiduciary Activities Handbook (Page 67).  The guidelines recognize that the preneed trustee is dependent upon the funeral company for individual consumer account information that will be used for performance and cancellation distributions.  Consequently, the OCC also refers banks to OCC Bulletin 2013-29 (additional requirements for assessing and managing risks inherent to third party funeral home relationships).  Thanks in part to NPS, banks have a KYC obligation to periodically assess the risk posed by the preneed trust:

  • Are the parties’ respective responsibilities and duties clearly outlined in the governing documents?
  • Does the funeral home provide periodic reports sufficient to reconcile deposit and distribution requests to consumer account balances?
  • Does the bank document periodic efforts taken towards oversight, accountability, monitoring and risk management?