As reported in several prior posts, the preneed examination process in Missouri has been a work in progress for the past five years. Funeral homes in that state have been selling preneed for more than 30 years without much oversight or recordkeeping guidelines. When the law was re-written in 2009 in response to the NPS collapse, the Missouri State Board of Embalmers and Funeral Directors was given the responsibility of examining each preneed seller at least once every 5 years. Now that each seller has been through an examination, the Board has the task of defining the seller’s record requirements so that the exam process can be streamlined. But streamlining the process will require guidelines that the Missouri industry can follow. Missouri has hundreds of preneed sellers that use joint accounts or trusts or insurance or, sometimes, a combination of all three. The examination process is further complicated when the seller uses different procedures for a single funding mechanism. For example, sellers with trust funded contracts frequently have some consumers making payments directly to the trustee and other consumers making payments to the funeral home.

With that background, one would have to look at the seller’s records proposal to be discussed this Wednesday by the Missouri State Board as a starting point. While the Board’s staff is under some pressure to initiate the next round of preneed examinations, the proposal does not provide sufficient guidance to sellers who want to make the next exam less painful. In our January 3rd post (Missouri Second Round of Exams:100% Reviews), we described the back and forth process that the State Board and its staff must navigate to define the next round of exams. To expedite that process, the State Board and their staff need to include the industry in the process of defining seller record requirements.

One of the weaknesses of Chapter 436, Missouri’s preneed law, is that it provides the State Board few enforcement powers beyond disciplining the preneed seller’s license.  There are plenty of examples of preneed sellers obstructing the State Board’s efforts to obtain preneed records.  At least one resorted to litigation as a delay tactic.  The prospect of having their license put on probation has not been much of a deterrent to some sellers.  Sellers were prepared to play a waiting game with the State Board for a settlement agreement offering a few years of probation.  SB 32 looks to remedy that by providing the State Board the teeth to impose financial penalties on the seller with serious financial deficiencies.

For the seller that obstructs the State Board audit functions, the bill would authorize the Board to require the seller to reimburse the Board’s audit expenses to the Preneed Audit Fund. 

The State Board may also require a seller to pay missing preneed funds back into their trust. 

And third, the State Board may fine a seller up to $10,000, which would be contributed to the Preneed Audit Fund.

This past Friday morning, news outlets across the country picked up an Associated Press story regarding Governor Parson’s October ouster of Missouri’s Gottcha Board.  (For those not familiar with the Missouri State Board of Embalmers and Funeral Directors, the tag “Gottcha Board” was first given to the Board in 2020 by the Missouri Funeral Directors Association.  Then later in 2021, the term was also adopted by the acting executive director of the Missouri Division of Professional Registration (Division).)  While the article delves deeply in to the funeral home inspections that sparked the current controversy, there is much more to the Sweeny-Phillips story.

This funeral home first got into trouble with the Gottcha Board in 2016 when it failed to renew their seller and provider licenses.  Over the span of two years, the funeral home ignored repeated demands from the Gottcha Board and eventually an administrative proceeding was initiated by the Board in 2018.  The funeral home eventually agreed to two years’ probation and to comply with all the licensing requirements of Chapters 333 and 436.  Prior to that agreement, the Division’s CIU inspections had not highlighted to the Board any problems at the funeral home.

With the 2 year probation about to expire, CIU inspectors were sent to Sweeney-Phillips on June 17, 2020 to determine whether the funeral home had complied with the terms of probation.  The CIU inspectors confirmed that the funeral home still did not have either a seller or a provider license, and that the funeral director in charge had failed to renew his license.  The CIU inspectors also reported that the funeral home had not retained (or obtained) authorizations to embalm or cremate.    The Board wrote the funeral home on June 23rd seeking a response to the violations.  The funeral home did not reply.

On July 27th, the Board sent its own inspector to the funeral home and found a multitude of violations that the CIU inspectors had missed, including the condition of the crematory chamber.  The funeral home had 45 preneed contracts without a license.  Two funeral home employees arranged and worked more than a hundred funerals without funeral director licenses.  The funeral home had provided numerous cremations and embalmings without the required documented authorizations.   All of these constituted violations of the funeral home’s probation agreement. (Click to access the Petition)

Despite the nickname given by the MFDEA, the Gottcha Board gives licensees an opportunity to explain themselves before disciplinary actions are pursued.   But it was not until after the Board filed a lawsuit that the funeral home began to take corrective actions.  The crematory was repaired and one of the employees obtained their funeral director license.  However, the other employee who had acted as a funeral director for more than 50 arrangements had not obtained a license.  Nor did the funeral home address its preneed violations.

Based on the preneed sales cited in the petition, we would estimate that Sweeney-Phillips had more than $300,000 in preneed sales since losing their preneed seller license.   While the Gottcha Board wanted to determine if those funds went into trust and stayed there until the contracts were performed, the Division overruled the Board and decided to let the funeral home off.   The Sweeney-Phillips lawsuit was dismissed November 30th.  So much for the SB1 promises made to preneed consumers twelve years ago.

The MFDEA’s response to its membership was to suggest that the article is biased because the reporter was influenced by persons who are anti-Division and/or anti-Governor Parsons.  It is obvious that the association attempted to spin the same yarn given to the Division, but the reporter would have no part of that.  The Division took a smarter strategy and refused to comment.   The Division has taken a similar defense to all the open records requests that we have made of it.  But, that is for a future post.

If the comment section to the Post Dispatch’s website is a barometer, the Missouri funeral industry is taking a hit.  Indirectly, the damage is self-inflicted. The Gottcha Board was attempting to do what it believed to be required for the protection of the funeral consumer.  The Sweeney-Phillips case demonstrated that the Board needed its own inspectors to rout out serious problems.   But, the MFDEA came up with the catchy “Gottcha Board” label, and complained to the Governor.  Then when a new Division acting director was appointed, the MFDEA found a sympathetic ear.  The rest is history.

Despite what some may say, the State Board shake up and the termination of its executive director came as a surprise.  But the most surprising move by the Division was the termination of Randall Jennings, the preneed examination supervisor.  The examination supervisor had no role whatsoever in the funeral home inspection process.  Baffled by that development, I went to a source that is in the know about how Jefferson City works.  Respecting the anonymity sought by this source, all I can offer is that a preneed seller had complained that the exam supervisor had referred to him with a derisive political adjective.

Over the course of the past 10 years, my clients have been through dozens of preneed financial examinations.  Those examinations had put me in contact with Mr. Jennings numerous times.  In some situations, this meant meeting with Mr. Jennings at the client’s office to discuss seller records and the procedures to be followed.  In each such meeting, Mr. Jennings behaved in a courteous and professional manner.  While a few clients complained about the onsite examination being an imposition on their time, none complained about Mr. Jennings’ demeanor.

Acknowledging that this source has an irrefutable reputation within the industry, I can’t help but think that the complaining preneed seller had other cause for going to the Governor or the Division.  Seeking to capitalize on the Governor’s displeasure over funeral home inspections, the seller planted another issue to address with a State Board housecleaning.  If the allegation had been handled appropriately, the Division would have referred it to the State Board when it had members familiar with Mr. Jennings and the preneed seller.  But instead, the Governor stacked the Board and the Division directed the terminations of the only two Board employees involved with the preneed reform efforts since the passage of Senate Bill No. 1.

For those who have forgotten, Senate Bill No. 1 was heralded by the Missouri Legislature as the reform that would protect Missouri preneed consumers (Senator Delbert Scott’s Press Release).  The Columbia Missourian reported how the new law authorized regular and random state audits of prepaid funeral sellers to ensure consumer funds remained in trust until funerals were paid for.

How does the State of Missouri propose to fulfill its promises of protection to the preneed consumers when the State Board is stripped of all employees with examination experience?  Will the Governor follow Harry’s lead and state the Buck stops at his desk?

“Allegiant [Bank] violated the industry standard of care by not maintaining consumer-level deposit records, because, as here, where there are multiple beneficiaries of a trust, the trustee must keep records of the individual deposits made for each consumer.”

This finding by the trial court in the NPS civil trial had to come as a shock to Allegiant Bank, and would probably come as a surprise to many preneed trustees.  With regard to the trustee’s recordkeeping requirements, both the NPS trust agreement[1] and applicable Missouri state preneed laws[2] incorporated typical industry standards. The Allegiant Bank trust officer believed that the records produced by the bank’s trust accounting system would suffice for compliance with the trust agreement and Missouri law.

During its 6 year term as the NPS trustee, Allegiant Bank did not request or maintain records of the deposit balances of the individual contract beneficiaries.  Allegiant Bank assumed that it could rely upon NPS to provide individual deposit balances upon request.  The trust officer believed he was not required by either the trust agreement or Missouri law to keep specific customer account information.  The trial court disagreed, finding that though Missouri law imposes a duty on the preneed seller to create a record of consumer payments and deposits, the statute does not abrogate the trustee’s duty to maintain records of deposits to the trust after that information is obtained from the seller.

The trial court reasoned that without keeping records of the deposit activity, the trustee could not reconcile trust transactions to determine if distribution requests were accurate.  The trial court did not find that the trustee has to create such individual consumer deposit records, but rather the trustee must seek such records from the seller and then keep them for purposes of reconciliation of distributions.

Click this hyperlink to view excerpts from the Findings of Fact and Law that discuss the individual deposit recordkeeping requirement.

 

 

 

 

 

 

[1] . Section 4.3 of the Trust Agreement stated: “Trustee shall at all times maintain accurate books and records reflecting all transactions in any way pertaining to the trust.”

[2] The first sentence of Section 436.031.5 read, “The Trustee of a preneed trust shall maintain adequate books of accounts of all transactions administered through the trust and pertaining to the trust generally.”

Our next criticism of Missouri’s pending Exam Handbook is its violation of the Four Corners Rule, which requires a document to stand on its own when being interpreted and applied.  Common law precludes parties from going to outside sources when applying the document to different situations.  While the Handbook gives lip service to the Four Corners Rule in Paragraph 13, other sections of the Handbook send examiners to various sections of law, to rules that have never been promulgated, and to other “Board directives” for directions when reviewing seller contracts or records.

The Handbook needs to be the examiner’s procedure bible that stands alone, and without incorporating statutes, rules or Board directives that exist only in a minute from a prior meeting.

“Nitpicking” was one of the terms frequently used by Missouri funeral directors when referencing their preneed exam exceptions report.  (Other descriptions are not appropriate for print.)  The initial exam guideline provided no guidance to examiners for prioritizing problems found in preneed contracts and records.  It was common to see exception reports with dozens, even hundreds, of technical ‘violations’.   The original guidelines did not distinguish certain types of preneed contracts, and that led examiners to erroneously cite numerous contracts with a disclosure violation.   Sellers were then required to respond to these erroneous exceptions.   These responses were frequently bounced back and forth between the Board staff and the seller, without giving the Board or its attorney a chance to weigh in.   Examinations could drag on for several months over insignificant issues.

The State Board eventually took its first step to address this problem a year ago October when a resolution was adopted to have the Examination Committee review each exceptions report before a Board letter would be sent out to the funeral home.   However, the Board’s then Chairman allowed the staff to continue to send exception letters without Board oversight.  Those subsequent exception letters continued to cite some of the same erroneous issues to sellers.

The format of the exceptions report can also be challenging to the State Board’s Examination Committee.  An exceptions report that is several pages long might suggest a funeral home might have some serious problems.  But, as it was with one of our clients, the exception report could be citing problems for contracts which the funeral home is not the seller.   It took multiple letters to the State Board’s Executive Director to resolve that issue.

The Board’s October exam handbook would bring the staff back to the path approved last October.   All exception reports would have to be reviewed by the Examination Committee before a letter is sent to the funeral home.   The examiners would have to prepare the exception report with a summary that classifies problems as legal, recordkeeping or financial.   The first round of examinations focused on contract form compliance and recordkeeping.  As a consequence, most exceptions tended to fall into one of those two categories.  Going forward, the Board should be focused on the financial issues, and the Examination Committee should turn to the exception report’s summary to see how many financial issues are listed.

While the State Board will remain diligent to see that preneed contract forms comply with Chapter 436, this can be the easiest of the industry’s problems to fix.  A seller can be required to revise its contract form and to agree to administer outstanding contracts in compliance with Chapter 436.

Recordkeeping could be a little more difficult to address.  Compliance could mean implementing new procedures or software, or obtaining professional assistance.  But generally, this means prospective changes to how records are created and maintained.   But that may not be necessarily be true when the seller has not maintained adequate records to document Section 436.031 distributions.

Financial exceptions could be one of several issues: the seller is underfunded, the seller is receiving improper distributions, the seller is not making timely deposits, the seller does not maintain adequate records to determine the adequacy of funding, or the seller does not main adequate records to determine compliance with Section 436.031.   Per the handbook, the exception report should explain whether financial problems appear to be isolated or systematic.   The examiner should also provide his/her assessment whether the financial problem is an obvious error.

The handbook’s instructions to prioritize and summarize the exception report are intended to help the Examination Committee with its own assessment when issuing an exceptions letter to the funeral home.  The exception letter could take different courses based on the Exam Committee assessment.   Minor exceptions could be noted to the funeral home with suggestions on how to address the issues, but that the Board is closing the examination file.  Funeral homes with recordkeeping problems and multiple financial errors may get an exception letter that seeks input from the funeral home regarding how it would propose correcting the problems.  Funeral homes with significant recordkeeping issues, significant underfunding or systemic financial issues would receive an exception letter seeking a detailed explanation to be given to the State Board.

 

The Missouri State Board’s proposed exam handbook would have examiners perform more of their review before an onsite visit is scheduled at the funeral home.  By performing a desk top review, the examiner would be better prepared when visiting the funeral home.  This should expedite the examination process.   There would be four stages to the desk top exam that starts with an information and document request.

Depending upon the sampling to be used by the Board, the examiner sends out an initial examination notification to the seller explaining the sampling process and requesting:  1) all preneed contract forms used since Seller’s previous exam, 2)an outstanding contracts report, 3)a serviced/canceled contract report, 4) copies of specified months of financial transactions (consumer receipt and funding agent transmissions), 5) identification of all funding agents, and 6) whether Section 436.031 income distributions were taken, and supporting documentation.   The seller would have 30 days to provide the contract form and contract reports, and 60 days to provide the other requested information and documents.

The second stage would involve a review of the seller’s annual reports for consistency in assigning sequential contract numbers, and for gaps in reported contracts review could be performed while the examiner waits for the contract forms and reports.

The third stage begins when the examiner receives the seller’s contract forms and contract reports.  Depending on the sampling that applies to the seller, the examiner will specify which outstanding contracts and performed/canceled contracts are to be made available for review during the on-site visit.  After sending a notification letter with the specified contracts, the examiner would then proceed to review the contract forms for Section 436.425 compliance.  This should save the examiner substantial time since the prior exam procedures required that he/she review each outstanding contract for disclosures compliance.

The fourth stage of the desk top exam would begin when the examiner receives the funding agent information, financial transaction reports and Section 436.031 distribution documents (if any).   From the seller’s consumer receipt records, the examiner will reconcile those with the corresponding transmission records and funding agent reports.   If there are any Section 436.031 distributions, the examiner will determine if the records are sufficient to confirm compliance with the statute.

During all four stages, the examiner will note issues or exceptions to discuss with the seller.  When the fourth stage is complete, the examiner will contract the seller to schedule the on-site visit.

Missouri’s pending preneed exam handbook will establish a new record keeping requirement for the state’s preneed sellers: monthly records of consumer payment receipts and the transmission of those funds to the preneed funding agent.  Seller record keeping proposals are not new to the Board.   (Missouri Seller Records: The State Board Proposal) The Board’s staff proposed a record keeping regulation three years ago, but both Board members and the industry objected.   (Missouri Preneed Seller Records: the Third Time did not prove a Charm) The staff proposal attempted to dictate the format of seller records, and would have subjected licensees to discipline for “inadequate seller records”.    The proposal did not explain the purpose for most of its requirements, and included provisions to allow the Board to expand the record requirements as it saw fit.  Those latter provisions invited abuse by the Board’s staff, a problem that eventually led to the ouster of the Board’s previous Executive Director.

The monthly receipt and transmission records differ from the staff effort in a couple of major ways.  First, the handbook does not dictate a format to sellers.  A seller may document each month’s consumer payment activity in any format so long as examiners can track a consumer payment from receipt by the funeral home to deposit with the funding agent.  But contrary to what one Board member has repeatedly suggested, a copy of the consumer check in the preneed file is a sufficient record.  Sellers would be required to create a record of all consumer payments received each month, and a corresponding record of all payments transmitted to each applicable funding agent.  The Board member opposing all forms of record keeping requirements has cited his own experiences with the IRS, which did not seek such types of records.  Such comments are misleading for several reasons.  First, the IRS actually does have record requirements for audits, and those requirements differ by industry (IRS hyperlink to industry audit guidelines).  The IRS audits for a different purpose than the State Board preneed audit.    And since the Board member’s IRS audit is confidential, no one knows where his representations are accurate.

Monthly deposit and transmission records would allow Board examiners to track consumer payments without having to wade into each preneed contract file.  The monthly records would also allow the exam staff to adopt different procedures for testing a seller’s compliance with Chapter 436’s main purpose: protecting consumer funds.

While the receipt and transmission record requirements may appear to impose two types of records, some Missouri funeral homes have been complying for years with a single record. Excel worksheets can document both the receipt of funds and their transmission to the funding agent.  (Hyperlink to the sample spreadsheet)

The Missouri State Board’s proposed exam handbook places a new emphasis on tracking consumer payments to funeral homes.  There are two elements to the Board’s strategy: confirming the consumer’s funds make it to the appropriate funding agent, and that those funds are remitted to that funding agent within the time periods required by Chapter 436.  The State Board’s main challenge will be detecting funeral directors that keep a consumer’s funds and never remit them to a preneed funding agent.  Funeral homes that cheat and keep consumer payments are not likely to report the contract or the consumer payments.   The State Board’s best chance at detecting a cheater may be the documentation required when the preneed consumer returns to the funeral home for the prearranged funeral.

Both Federal and Missouri law require that a funeral home issue a written statement of goods and services (the “Statement”) to each purchaser of a funeral.  The Statement is a contract between the funeral home and the consumer that sets out the price of goods and services, and how the funeral bill is paid.  Missouri law further states that a preneed contract cannot be used in lieu of a Statement.   Accordingly, a Missouri funeral home must prepare a Statement for each preneed contract it performs.  The preneed purchaser (or his/her legal successor) can best determine if the Statement has been prepared consistently with the terms of the preneed contract.

As required by Missouri law, and the FTC’s Funeral Rule, the Statement must set out the form of payment.  The preneed exam handbook contemplates that payment explanation should reference the preneed contract and its funding agent.  To find a cheater, the State Board’s exam handbook would have the auditor review the funeral home’s Statements for preneed payments and then match those Statements  to funding agent records for contract listings and performance disbursements.  If there is no corresponding record of the preneed contract or the payment, then the cheater has some explaining to do.

Even when a cheater is exposed by its Statements and lack of funding agent records, a county prosecutor may still be reluctant to pursue fraud charges.  A fraud prosecution requires financial injury to the preneed contract purchaser.   When the contract has been performed by the funeral home without additional payment, there has been no injury to the consumer.   So long as a funeral home can hang on and perform preneed contracts, the State Board and the prosecutor are held at bay from bringing fraud charges.  Criminal charges are frequently deferred until the funeral home has failed and gone out of business.  That is too late for consumers who have outstanding preneed contracts.

Instead, cheaters can be prosecuted under Chapter 436 provisions that require timely deposit of consumer funds.  Depending on the form of funding, Missouri law requires that funeral homes remit consumer funds to the funding agent with a specific number of days (joint accounts are 10 days, insurance requires 30 days and trust funding requires 60 days).   Per Section 436.465 it is the seller’s duty to maintain adequate records to show compliance with the law.  By making receipt and transmittal records a fundamental element of preneed exams, the State Board can begin establishing recordkeeping standards for sellers that prosecutors can rely upon when pursuing the cheaters.