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Jo Ann Howard and Associates, P.C. v. Cassity

United States Court of Appeals, Eighth Circuit

August 17, 2017

Jo Ann Howard and Associates, P.C., Special Deputy Receiver of Lincoln Memorial Life Insurance Company, Memorial Service Life Insurance Company, and National Prearranged Services, Inc.; National Organization of Life and Health Insurance Guaranty Associations; Missouri Life and Health Insurance Guaranty Association; Texas Life and Health Insurance Guaranty Association; Illinois Life and Health Insurance Guaranty Association; Kansas Life and Health Insurance Guaranty Association; Oklahoma Life and Health Insurance Guaranty Association; Kentucky Life and Health Insurance Guaranty Association; Arkansas Life and Health Insurance Guaranty Association, Plaintiffs - Appellees,
v.
J. Douglas Cassity; Randall Sutton; Brent D. Cassity; Tyler J. Cassity; Rhonda L. Cassity; Katherine P. Scannell; Randall J. Singer; Howard A. Wittner; Wittner, Spewark and Maylack, PC; David R. Wulf; Wulf, Bates and Murphy, Inc.; Michael R. Butler; Lennie J. Cappleman; James M. Crawford; Larry Keith Hale; Tony B. Lumpkin, III; Erin P. Engle; Nekol Province; Roxanne J. Schnieders; Kelly Tate; George Wise, III; Marianne Jones; Anne Chrun; National Heritage Enterprises, Inc.; Forever Enterprises, Inc., formerly known as Lincoln Heritage Corporation; Lincoln Memorial Services, Inc.; Forever Network, Inc.; Forever Illinois, Inc.; Hollywood Forever, Inc.; Texas Forever, Inc.; National Prearranged Services Agency, Inc.; Legacy International Imports, Inc.; Wise, Mitchell and Associates, LTD; Brentwood Heritage Properties, LLC; Brennen Bank and Trust Company, Defendants, National City Bank, Defendant-Appellant, Marshall and Ilsley Trust Company, N.A.; Southwest Bank; U.S. Bank, N.A.; Bank of America, N.A.; American Stock Transfer and Trust Company; Comerica Bank and Trust, N.A.; Brown Smith Wallace, LLC; John Does, 1-25; Rhonda L. Cassity, Inc., Defendants, PNC Bank, N.A., Defendant-Appellant, BMO Harris Bank, N.A.; Richard Markow; Herbert Morisse, Defendants, American Bankers Association; Missouri Bankers Association, Amici on Behalf of Appellant(s). Jo Ann Howard and Associates, P.C., Special Deputy Receiver of Lincoln Memorial Life Insurance Company, Memorial Service Life Insurance Company, and National Prearranged Services, Inc.; National Organization of Life and Health Insurance Guaranty Associations; Missouri Life and Health Insurance Guaranty Association; Texas Life and Health Insurance Guaranty Association; Illinois Life and Health Insurance Guaranty Association; Kansas Life and Health Insurance Guaranty Association; Oklahoma Life and Health Insurance Guaranty Association; Kentucky Life and Health Insurance Guaranty Association; Arkansas Life and Health Insurance Guaranty Association, Plaintiffs - Appellants,
v.
J. Douglas Cassity; Randall Sutton; Brent D. Cassity; Tyler J. Cassity; Rhonda L. Cassity; Katherine P. Scannell; Randall J. Singer; Howard A. Wittner; Wittner, Spewark and Maylack, PC; David R. Wulf; Wulf, Bates and Murphy, Inc.; Michael R. Butler; Lennie J. Cappleman; James M. Crawford; Larry Keith Hale; Tony B. Lumpkin, III; Erin P. Engle; Nekol Province; Roxanne J. Schnieders; Kelly Tate; George Wise, III; Marianne Jones; Anne Chrun; National Heritage Enterprises, Inc.; Forever Enterprises, Inc., formerly known as Lincoln Heritage Corporation; Lincoln Memorial Services, Inc.; Forever Network, Inc.; Forever Illinois, Inc.; Hollywood Forever, Inc.; Texas Forever, Inc.; National Prearranged Services Agency, Inc.; Legacy International Imports, Inc.; Wise, Mitchell and Associates, LTD; Brentwood Heritage Properties, LLC; Brennen Bank and Trust Company, Defendants, National City Bank, Defendant-Appellee, Marshall and Ilsley Trust Company, N.A.; Southwest Bank; U.S. Bank, N.A.; Bank of America, N.A.; American Stock Transfer and Trust Company; Comerica Bank and Trust, N.A.; Brown Smith Wallace, LLC; John Does, 1-25; Rhonda L. Cassity, Inc., Defendants, PNC Bank, N.A., Defendant-Appellee, BMO Harris Bank, N.A.; Richard Markow; Herbert Morisse, Defendants, American Bankers Association; Missouri Bankers Association, Amid on Behalf of Appellee(s).

          Submitted: September 20, 2016

         Appeals from United States District Court for the Eastern District of Missouri - St. Louis

          Before COLLOTON, MELLOY, and SHEPHERD, Circuit Judges.

          COLLOTON, Circuit Judge.

         PNC Bank appeals a jury verdict in favor of special deputy receiver Jo Ann Howard and Associates, P.C., and a group of state guaranty associations (together, Appellees). The jury found PNC liable for negligence and breach of fiduciary duty in violation of its duties as trustee of various preneed trusts created by National Prearranged Services, Inc. On appeal, PNC makes three arguments: (1) the district court improperly concluded that Appellees' claims arise in tort rather than under the law of trusts; (2) Appellees' claims should have been tried to the court rather than a jury; and (3) the district court improperly disallowed PNC's defenses. Appellees cross-appeal, arguing that the district court erroneously dismissed their tort claims alleging that PNC's predecessor-in-interest aided and abetted fraud and breaches of fiduciary duty. We conclude that Appellees' claims arise under trust law, that the claims are properly tried to the court, and that the measure of damages is limited accordingly. We further hold that the district court properly limited PNC's defenses, and correctly dismissed Appellees' aiding-and-abetting claims. We therefore affirm in part, reverse in part, and remand for further proceedings.

         I.

         This case arises out of the nationwide fraud scheme of National Prearranged Services, Inc. (NPS), a Missouri-based seller of preneed funeral contracts. The Cassity family owned and operated NPS. NPS operated across the country, but the company's activities in Missouri are the subject of this appeal. The Cassitys also owned two Texas-based life insurance companies, Lincoln Memorial Life Insurance Company (Lincoln) and Memorial Service Life Insurance Company (Memorial).

         Chapter 436 of the Missouri Revised Statutes, now repealed, governed the making of preneed funeral contracts in Missouri during the relevant period. Mo. Rev. Stat. §§ 436.005-.071 (2008) (repealed 2009). A preneed contract was an arrangement that required the current payment of money in consideration for funeral services to be provided later at the time of a death. Id. § 436.005(5). NPS sold preneed funeral contracts that allowed consumers to purchase funeral services at a fixed price. Under a preneed contract, a purchaser selected the merchandise and services that the purchaser wanted for the contract beneficiary, which was either the purchaser or a third party. When this contract beneficiary died, the purchaser's chosen funeral home performed the funeral according to the contract.

         Under Missouri law, NPS could retain up to twenty percent of the proceeds of each preneed funeral contract. Mo. Rev. Stat. § 436.027. NPS was required to deposit the other eighty percent into a trust. Id. §§ 436.021.1(2), 436.027, 436.031.1. The statute provided that NPS must appoint a state or federally chartered financial institution as trustee of its trusts. Id. § 436.031.1. The trustee was to invest and reinvest the assets deposited in the trusts. Id. § 436.031.2. Because the NPS trusts held funds in excess of $250, 000, NPS was allowed to appoint an independent qualified investment advisor to make investment decisions for the trust property. Id.

         Missouri law also dictated how NPS distributed payments to funeral homes. After a consumer's funeral, the funeral home submitted a written certification to NPS establishing that it provided the funeral services to the deceased consumer. Id. § 436.045. Upon receipt of the certification, NPS paid the funeral home the amount specified in the preneed contract plus a "growth" payment. The "growth" payment protected funeral homes against rising funeral costs. Once NPS paid the funeral home, NPS was entitled to a distribution from the trust equal to all deposits made into the trust for the particular preneed contract. Id.

         Allegiant Bank became the trustee of NPS's Missouri trusts in August 1998. Allegiant's responsibilities as trustee were set forth in the NPS trust agreement, which was governed by Chapter 436. When Allegiant assumed its role as trustee, NPS already had appointed Wulf Bates & Murphy (Wulf) as its investment advisor. Wulf served throughout Allegiant's tenure as trustee. During this time, Wulf used trust assets to purchase Lincoln life insurance policies. The policies insured the lives of NPS's preneed consumers in Missouri. When a consumer died, Lincoln paid the proceeds of the policies to the NPS trusts.

         Allegiant served as trustee until May 2004, when it resigned after being acquired by National City Bank. Because National City Bank did not want to assume Allegiant's role as trustee, Allegiant transferred the trust assets to Bremen Bank, which became the trustee. When Allegiant resigned, NPS's Missouri trusts held $122.9 million in deposits and $159.8 million in Lincoln life insurance coverage. In 2009, PNC acquired National City Bank. PNC's potential liability in this case, therefore, derives solely from its acquisition of National City Bank, Allegiant's successor-in-interest.

         In 2007, insurance regulators discovered that NPS had engaged in massive fraud for years. At the direction of NPS, Lincoln routinely issued policy loans to NPS against Lincoln life insurance policies owned by the Missouri trusts without the trustee's written approval. NPS caused the loans to issue even though the trustee was the only party permitted to take such a loan. This practice depleted trust assets. Separately, and outside of Missouri, NPS manipulated the payment amounts reflected on life insurance policy applications, allowing it to retain most of the money that should have been sent to the issuing life insurance company. For example, if a consumer paid fifteen hundred dollars for an insurance policy, NPS would change the amount paid to five dollars, send five dollars to Lincoln, and keep the rest of the money.

         As a result of this fraud, a Texas receivership court placed NPS, Lincoln, and Memorial into receivership, and the court appointed the special deputy receiver. Because Lincoln and Memorial were life insurance companies, their receivership triggered coverage by the state guaranty associations. State guaranty associations are non-profit organizations that protect consumers by honoring the obligations in consumers' policies when insurance companies fail. In this case, the associations are making payments on the policies issued by Lincoln and Memorial. These payments ensure that consumers' funerals are paid for upon death even though the insurance companies are in receivership.

         After the three entities were placed into receivership, the receiver and the associations agreed to a liquidation plan for the entities. Under the plan, the associations agreed that any death benefits that would otherwise be due or payable to NPS or its trusts under the policies would be paid to funeral homes. The funeral homes and consumers, in turn, agreed to assign to the associations any rights under, and causes of action relating to, the policies.

         In August 2009, Appellees commenced this action. They sued on behalf of NPS, funeral homes, and consumers. The complaint alleged that Allegiant, PNC's predecessor, breached its fiduciary duties as trustee, was negligent, and aided and abetted fraud and breach of fiduciary duty. Appellees asserted that Allegiant breached its fiduciary duties and was negligent when it allowed NPS to take policy loans on the trust-owned insurance policies, failed to ensure that the loans were adequately secured, neglected to account adequately for the funds in the NPS preneed trusts, failed to keep and review adequate records of trust transactions, and failed to verify trust account records. As a result of these breaches of duty and negligent acts, the complaint alleged, Allegiant allowed NPS agents to manipulate trust assets and siphon millions of dollars from the NPS trusts. In separate aiding-and-abetting claims, the complaint alleged that Allegiant knew of independent breaches of fiduciary duty by Wulf and acts of fraud by NPS, and substantially assisted or encouraged them.

         Before trial, PNC moved to strike Appellees' jury trial demand, arguing that although their claims were presented as tort claims, the claims were actually a single equitable claim for breach of trust. The district court denied the motion because it determined that Appellees' claims arose under tort law and were actionable at law. PNC later moved for partial summary judgment, arguing that trust law defines Appellees' available monetary remedy for breaches of trust. The district court again concluded that Appellees' claims were not subject to the trust-law measure of damages because the suit was an action at law.

         In its motion for summary judgment, PNC also argued that NPS was the only trust beneficiary, and that PNC was therefore entitled to raise defenses of authorization and in pari delicto. The court determined that PNC could not raise these defenses against either the associations or the receiver. The court also rejected PNC's contention that under Mo. Rev. Stat. § 436.031.2, Allegiant could not be liable for Wulf's investment decisions. The district court granted PNC's motion to dismiss Appellees' aiding-and-abetting claims on the grounds that Appellees failed to adequately plead their claim and that Missouri does not recognize such claims in any event.

         The claims alleging breach of fiduciary duty and negligence proceeded to trial. Appellees claimed $355.5 million in compensatory damages. This amount included losses on policies that occurred inside and outside of Missouri both before and after Allegiant's tenure as trustee, unpaid "growth" payments to funeral homes both inside and outside of Missouri, and obligations on preneed contracts that were not associated with Lincoln or Memorial life insurance policies. Of the $355.5 ...


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