Late in 2021, PNC Bank threw in the towel. After years of litigation and two appeals, PNC Bank agreed to a settlement with the NPS special deputy receiver. Last month, our Illinois clients began receiving POC notices from the SDR that a portion of their claims for inflation would be honored. Payment of funeral home POCs signals the beginning of the end of the NPS receivership. This got us to thinking about the impact of the NPS court decisions on preneed trust administration. The watershed finding for PNC Bank’s liability was that provider funeral homes are beneficiaries of a third party seller preneed trust. In states other than Missouri, the provider funeral home must be a party to the preneed trust and have always been owed duties by the trustee. But because Missouri preneed law authorizes third party preneed sellers, those types of entities have excluded the provider funeral home from being a party to the trust. So for Missouri’s remaining handful of third party sellers, the NPS appellate decisions are game changers.
Most states’ preneed laws define a preneed seller to be a licensed funeral home. Common sense suggests that the entity with the obligation to perform the contract will be diligent in safeguarding the consumer’s funds. While states allow the funeral home to employ an agency to market, sell and administer consumer funds, they will not allow an independent entity to step between the funeral home and the consumers’ funds.
Missouri was in that same boat until 1982. That law change had been lobbied by National Prearranged Services and Funeral Security Plans, companies which acted as preneed sales agencies for funeral homes in various states. The key change sought by NPS and FSP was the definition of a preneed seller. If the seller was no longer required to be a licensed funeral home, an independent entity could control the entire preneed transaction. In the 1980s’, the trust funded preneed was king, and these future third party sellers wanted control over the trustee. It was described to this author as the golden rule: he who controls the gold will rule. By controlling the funding arrangement, the third party seller would also control the funeral home provider. Using a separate funeral home provider contract to set out the terms of preneed contract performance and payment, a seller could exclude the provider funeral home from trust management and investment oversight.
When sued for its role in the NPS collapse, PNC Bank argued that claims made by the SDR on behalf of provider funeral homes were inappropriate because they were not beneficiaries of the NPS trusts. PNC Bank cited the court to Chapter 436, and argued the position that NPS had taken with funeral homes for decades: funeral directors have no rights under our trusts. In the first civil trial, the court erroneously allowed tort claims to be asserted. Those tort claims resulted in large damage awards against PNC Bank that were eventually overturned in the first appeal. When the case was remanded to the trial court, the issues were narrowed to breaches of fiduciary duty, and the trial court ruled that NPS’ provider funeral homes were beneficiaries of the trusts. PNC Bank appealed again. In the decision filed in August 2017, the Eighth Circuit agreed with the trial court and turned the third party seller trust argument upside down. By affirming provider funeral homes to be trust beneficiaries, the appeals court superimposed the Missouri uniform trust code on to Missouri preneed trusts and the seller/provider relationship.
For four decades, third party preneed sellers have told disgruntled provider funeral homes to go pound sand. A seller like NPS could cite the seller/provider agreement to deflect the funeral home’s demands for information. The Eighth Circuit changed all of that. Because preneed trusts make distributions to the provider funeral home, the Missouri uniform trust code deems it to be a “qualified beneficiary”. As a qualified beneficiary, a provider funeral home can side-step the seller’s stonewall and request an accounting from the trust’s fiduciary. If NPS provider funeral homes had made accounting demands on Allegiant Bank, their top management may have looked closer at NPS’ actions.
If a third party seller can no longer isolate a trustee from the disgruntled funeral director, will a bank or trust company accept a Missouri third party seller trust?