As discussed in a prior post, the Missouri State Board of Embalmers and Funeral Directors is now four years removed from Senate Bill No. 1 and the exigent circumstances that authorized emergency rules. The State Board must now address several issues through the formal rulemaking process. Understanding that the process may take a year or more, that carpenter’s adage about avoiding waste seems particularly apropos. No agency wants to spend the time and resources promulgating and implementing a rule only to have a court or the administrative hearing commission strike it down. Nor does the industry want to waste resources implementing compliance procedures that prove to have been for naught.

The Missouri Bar Association’s Handbook on Administrative Law contains a short checklist for attorneys that look to challenge either an administrative rule or a policy implemented outside of the rulemaking process. In a nutshell, the checklist describes three areas of challenge: the statutory authority for the rule (including whether the rule is consistent with the law), the procedural requirements, and whether the rule is arbitrary, unreasonable or an abuse of discretion.

We feel that some of the proposals, as currently written, fall short of these measures. Depending on how the proposals are to be submitted to the Secretary of State, we plan to apply these measures to certain of the proposed rules.

To gain a better appreciation of the challenges of promulgating an administrative rule, the Missouri Secretary of State provides a hyperlink to the basics of rulemaking.

The Dead Beat recently published a letter from a Missouri funeral home operator that was critical of the ‘handling of the NPS debacle’ by the Missouri State Board of Embalmers and Funeral Directors. The operator questioned how the Board could ‘allow’ his firm to sign official documents requiring that NPS contracts be honored. The official document he refers to is the “Affidavit” that the State Board requires from a licensee when it seeks to acquire the assets of a preneed seller. Through the Affidavit, Missouri’s Division of Professional Registration has sought to establish transferee liability for preneed obligations where none existed under state law. The Affidavit uses the term “obligations” to provide a broad application (presumably to catch oral agreements and non-compliant contracts), and its use was defended on rationales that included the following:

• Funeral homes should not be allowed to purchase another funeral home’s assets without also agreeing to perform its preneed contracts.
• Acquiring entities should perform the requisite due diligence before agreeing to purchase another funeral home.
• The State Board has very limited authority to audit preneed sellers and the Affidavit is a tool to protect consumers.

The letter asserts that the State Board knew of the imminent collapse of NPS, and therefore had a duty to disclose relevant information before requiring the Affidavit. While the State of Missouri will take issue with what the State Board knew about NPS in 2007, the question remains whether the requirement of the Affidavit imposes upon the State Board an obligation to disclose all information an acquiring entity could deem relevant. Prior to the passage of SB1, the question was rather academic because the State Board did not have the resources or the requisite authorities to audit preneed sellers. The Affidavit has since been revised to require a report from the seller, but it remains incumbent upon the acquiring entity to seek more information from both the seller and the State Board.

The unspoken question is whether the Affidavit can be enforced by the State Board against the acquiring entity when both fail to find hidden preneed obligations.
 

At its December meeting, Missouri’s State Board of Embalmers and Funeral Directors will seek input from licensees and consumers regarding several rulemaking proposals. The proposals were published on the Board’s website in November, with a request that comments be provided to the Board by December 2nd. This represents a prelude to the formal rulemaking process which involves publication and comment periods which take a minimum of six months. Typically, the formal rulemaking process results in comments that require revisions be made to the proposals. Those revisions require further publication and comment opportunities. For a board that only meets periodically, responding to comments can add several months to the rulemaking process. Though such delays may be frustrating to an agency, this process is intended to provide the flexibility needed to interpret and apply a law while minimizing the risks of bureaucratic arbitrariness and overreaching. If the process is ignored in favor of an action or policy that constitutes ‘informal rulemaking’, the agency runs the risk of having that action or policy being struck down by the administrative hearing commission or by the courts.

For a Missouri funeral industry that has grown weary of the autocratic nature of preneed reform under SB1, the December meeting will provide just the first opportunity to comment to the State Board’s proposed rules. The December 2nd due date is merely a date by which comments can be included in the Board’s agenda packet. Some of the proposals are new and ‘rough’, and difficult to respond to without an explanation from the Board staff. Consequently, we anticipate the rulemaking process will involve a test of patience for both the State Board and the industry.
 

The St. Louis Post Dispatch reports that the sentencing hearing for Doug Cassity will be held today. Originally scheduled for November 7th, the hearing was postponed when additional pleadings were filed with the Federal court. Mr. Cassity continues to dispute the extent of the damages caused by his actions. As we noted in a prior blog post, Mr. Cassity’s plea agreement left to be determined a sentencing guideline that would be triggered when losses attributed to Mr. Cassity’s conduct exceeded $400,000,000.00. Subsequent to the execution of that plea agreement, one of the defendant attorneys disclosed a cache of NPS records and computers that had been hidden from the NPS receiver and the government attorneys. We can’t help but wonder whether the post plea misconduct provisions of Mr. Cassity’s agreement may have played a role in the sudden disclosure of the NPS records. Rather than have his plea thrown out, Mr. Cassity came clean about the records. The amount of losses reported by the Post Dispatch this morning is $512 million. That is still far less than the $900 million number that was frequently reported by various sources four years ago (which is probably a more accurate number than any amount based on NPS records).

Funeral homes and consumers will bear these losses for many years to come. Funeral homes will receive far less than what was promised them when honoring the NPS contracts. These funeral homes may have little choice but to raise their prices to stay in business, and consequently, the public at large will also bear some of the loss. Like a tax, the guaranty payments will also be funded through premiums on future insurance sales. Hopefully, Judge Hamilton will not fall for another Cassity shell game.

 

Many funeral homes have an informal practice of accepting small insurance policies from individuals who want to know their funeral expense will be taken care of at the time of death. Often, the individual may not be comfortable discussing their funeral preferences with family, and trust the funeral director to apply the insurance proceeds appropriately. Missouri funeral directors were offended two years ago when the state’s regulatory staff suggested this situation was ripe for abuse. (The Missouri regulators have since passed regulations requiring a preneed contract in this situation.) But in the past few months, an increasing number of funeral homes have confided that they have been victimized by the informality of this practice. One such funeral home had maintained possession of an insurance policy for several years before providing a funeral equal to the stated death benefit. It was not until weeks later that the funeral home learned the policy’s death proceeds were less than half of the stated benefit.

Some of our clients express their reluctance in requiring a contract or charging a fee under such circumstances. They perceive this as an accommodation to the individual. However, a court would find that a contract was formed when the funeral director accepts the policy. For the funeral home that falls victim to this practice, a court could quite possibly say shame on them for not spelling out the terms of that contract.

As a business, the funeral home has the duty to define the terms of each contract, and the most important term was whether the funeral home had accepted the policy as full payment for the individual’s funeral. The hurdle for recovering an unpaid balance through litigation is also complicated by the fact that the funeral home had two opportunities to define their terms for accepting the insurance policy: when the individual originally brought the policy to them and then again at the arrangement meeting with the surviving family.

If the individual came to the funeral home with specific requests for the funeral arrangement, then that would have been the best time to set out the details of the arrangement for the surviving family to follow at the time of death. The problem with making promises about price guarantees is that the funeral home will not know with certainty what that policy will be worth until the time of death. Accordingly, funeral homes often use a form of non-guaranteed contract (I’ll apply the insurance proceeds to your service, but someone will have to assume responsibility for any unpaid balance). Even if the individual wants price guarantees, that promise would have to be conditioned on what is paid on the insurance policy. On the other hand, if the individual simply sought to have the policy proceeds applied to her funeral costs (leaving the arrangement selection to family members), that understanding needs to be documented at both the time of the assignment and again at the at-need arrangement. The survivors need to know they have a legal obligation for the costs that exceed the policy proceeds. The survivors should also be required to cooperate with the funeral home’s efforts to recover the policy proceeds. More than one client has had the experience of an insured’s survivor making the at-need arrangements and then subsequently attempting to surrender the same policy for its cash surrender value.
 

The Missouri law governing means testing for public assistance (RSMo. Section 208.010) was amended this past August to allow an individual to set up an ‘irrevocable funeral trust account’ and exclude $9,999 of funds for funeral and burial expenses.  This legislation was sought by a funeral director that wanted to offer families an alternative to regulated preneed contracts.   Like many states’ public assistance laws, Missouri law excludes irrevocable preneed contracts from the individual’s resources.  [Many states impose limitations on the size of the preneed contract.]  But with the costs of complying with Missouri’s Chapter 436 (and with limited preneed funding options for rural funeral homes), the bill’s sponsor felt consumers needed additional funding options.  But, when Missouri’s State Board of Embalmers and Funeral Directors discussed the bill last June, the Board’s consumer representative member was very critical of this option because of the following provisions:

No person or entity may charge more than 10% of trust assets for creation of the trust and no more than 3% for maintenance of the trust.

The consumer representative’s concerns were that between set up and annual fees, the ‘irrevocable funeral trust account’ could be depleted in a matter of years.

When the State Board met in September (subsequent to law’s passage), a public attendee to the meeting reiterated the same concerns and recommended that the Board take action. But in reality, the new law is consistent with the actual costs of establishing and maintaining a trust with a corporate fiduciary.

The Missouri law requires that the new funeral trust account have a trustee that is “a state or federally chartered financial institution authorized to exercise trust powers in the state of Missouri”. What seems to be lost on consumers (and funeral directors) is that a bank must have a separate trust charter to provide fiduciary services, and many smaller banks do not have a trust charter (and cannot serve as a trustee). Early state preneed laws often borrowed from the Totten trust doctrine by allowing the funeral home to set up a depository account at the local bank. (Nebraska law goes so far as to refer to such accounts as trusts.) While, the simplicity of the Totten trust appeals to consumer groups such as the Funeral Consumer Alliance, the Missouri law requires a fiduciary that will assume responsibility for paying excess funds to the State. Such responsibilities come at a cost.

We Googled for Missouri corporate fiduciaries that posted their fee schedules on the Internet, and found Comerica and Edward Jones Trust. Neither disclosed a setup fee, but each had minimum annual fees that exceeded $1,000. We expanded our search and found little Yellowstone Trust Company, which charges $200 for setup and a minimum $600 annual fee. We have fiduciary clients which charge similar amounts for trust setup, which is used to cover the expenses of performing due diligence and establishing accounts on the bank’s administrative platforms (monthly accounting, tax accounting, on line platforms, etc).

The drafters of the new Missouri law must have had some appreciation for the expenses that accompany a corporate trust account because the provisions authorize the trustee to commingle accounts for investment purposes. Commingling accounts for investing provides the necessary economies of scale to reduce costs and thereby make the irrevocable funeral trust account economically feasible. But, the break points for such economies of scale are often in the tens of millions of dollars. And, pooled funds maintained by banks are subject to the Office of the Comptroller of the Currency (the OCC) and 12 CFR Part 9. If a pooled fund strays outside of 12 CFR Part 9, the fund will trigger the SEC’s jurisdiction under the Investment Company Act and its registration requirements.

We believe there is a need (and a demand) for a ‘final expense’ trust product (other than the one hawked by insurance companies). But, the viability of such a product will depend on whether it can be structured to comply with the OCC and SEC exceptions made for regulated preneed trusts. Without those exceptions, accounts like the Missouri funeral trust account will be forced to invest in depository accounts, leaving the arrangement too expensive to be an option to consumers.

In its past two newsletters, my local chapter of the Funeral Consumer Alliance has reported on the difficulties in finding cemeteries that permit natural burials. In the Spring newsletter, the FCA of Greater KC reported on how the Catholic Cemeteries of Northeast Kansas was reconsidering natural burials at one of its six cemeteries. In the Fall newsletter, the Alliance expressed disappointment and frustration with the Archdiocese’s failure to act on the growing demand. The article takes the point of view that the lack of profit in a green burial may be what is keeping the area’s established cemeteries from offering green burials. The article also alludes to the ‘banning’ of natural burials. I anticipate that the ‘banning’ alluded to by the article are the cemeteries’ rules and regulations. Those rules and regulations are among several factors that represent hurdles to a cemetery offering green burials.

Cemetery rules and regulations govern interment rights much in the same way that homeowner association rules govern residential properties. Several decades ago, cemeteries began to incorporate vault requirements into the rules and regulations. A set of rules and regulations may govern the whole cemetery, or specific gardens. (Why do cemeteries require vaults?) So, even though there may be a demand for a natural burial (without a vault), the cemetery cannot go against its own rules and regulations. In order to meet the demand for natural burials, the cemetery might have to dedicate a new garden for this purpose. If a cemetery has available land for such purposes, there are legal requirements that must first be satisfied.

In the Kansas City region, use of land for burial purposes requires a special use permit from the proper zoning authority. This can be a lengthy process that is subject to notice requirements to neighboring landowners. A proposed green cemetery in Wisconsin found this requirement to be more troublesome than it originally thought.

A new garden would also require the cemetery to hire engineers to survey and plat the garden for filings required at the local registry/recorder of deeds.

The cemetery will also have to decide whether to be certified by an organization such as the Green Burial Council. While the certification can be valuable for marketing, the Council founder has acknowledged that many green cemeteries fail for financial reasons. (See the Wisconsin story again.)

If the cemetery perceives there is enough demand to warrant these costs, then they will need to consider a different set of rules and regulations (and contract forms) for the green burial garden.

All of this may be too steep a price for established cemetery operators that have substantial investment in gardens that require burial vaults. Unsold spaces in those gardens represent ‘inventory’, and the cemetery will not want to invest in new inventory that involves a completely different business model.

In surfing the Net, we came across this page from a Massachusetts group trying to start their own green cemetery. We wonder whether the local municipal cemetery might be a better option.

Click the following hyperlinks if you would like a full version of the FCA of Greater KC Spring Newsletter or the Fall Newsletter. The Alliance will have its Day of the Dead annual meeting on November 1st, with Josh Slocum as its keynote speaker. To learn more, follow this hyperlink to the FCA of Greater KC website. 
 

A few weeks ago, we posted on the Wisconsin Master Trust and the smaller operator’s need for legislation. The Milwaukee Journal Sentinel reported this past week that the Association filed a motion with the court seeking to suspend the investment returns promised to consumers. The Association is quoted as having told the court that the trust in no position to gamble that its real returns will keep up with an artificial rate of return. The artificial rate of return the Association refers to is 1% over the average certificate of deposit return. Worded in another way, the Association is suggesting that the trust cannot be invested so as to provide a gross rate of return of 3.5%, or a net return of 2%. Nonsense.

The Association understands that the legislation that they need to meet the promises made to consumers would have to come at the expense of a compromise on the legislation sought by the cemetery industry (and favored by the consolidators). But, some within the Association are prepared to sacrifice the smaller operators rather than to give on legislation.

We also find this situation ironic in that a Wisconsin based preneed insurance company is precluded from offering its new hybrid trust/insurance product in its own home state. Everyone seems to have something to gain from a legislative compromise, but the fear of increased competition has everyone at an impasse.
 

The Cassity shell game may have came to an end this past week when aFederal judge ordered the seizure of NPS computers and 260 bankers boxes of records. Taking a page from a Six Feet Under script, NPS officers sought to conceal their misdeeds by hiding records and computers in crypts located at two of the Forever Cemeteries controlled by the Cassity family trust. From the tenor of the Court’s rulings, the judge did not find much humor in this script. NPS providers can hope that the Federal judge presiding over Mr. Cassity’s sentencing appearance will have a similar reaction to these extenuating circumstances

In a motion to convert the Wisconsin Master Trust from a preneed trust to a liquidating trust, the Receiver outlined to the court why the trust cannot keep its promises to consumers and comply with Wisconsin’s preneed law. Section 445.125 restricts preneed funeral trusts to depository accounts, and CD returns won’t even pay the Master Trust’s operating expenses (even after the Receiver has dramatically reduced those expenses). The WMT must diversify its investments just to meet its existing obligations, and to do so the Receiver proposes to transform the trust and take it out from underneath Section 445.125. This could mean that the Association may never regain control of the WMT, and that would deprive Wisconsin’s smaller operators a realistic alternative to insurance funding. Legislation is needed to replace Section 445.125 with the Prudent Investor Rule, but the Association faces a hostile cemetery industry and critical independents. It was only two years ago that the Association relied upon WMT fees to fund the fight to defeat cemetery legislation. With the cemetery industry seeking to re-introduce its legislation, the WFDA faces a situation of playing the spoiler role again while needing to explore all possible avenues to legislation that would preserve their ability to regain control of the WMT.