In Jo Ann Howard & Associates, et al. v. National City Bank; PNC Bank, N.A., now pending before the United States Court of Appeals for the Eighth Circuit, a Missouri bank entered into a contractual and statutorily authorized role as trust administrator of “pre-need” funeral services accounts. The accounts were funded by a company called National Prearranged Services (NPS) from its sales of “pre-need” contracts to individuals who could thereby purchase future funeral services at current fixed pricing. While the factual background is convoluted, the bank apparently facilitated distribution of the trust funds upon the instructions of NPS, the trust beneficiary, and these funds subsequently were misappropriated by NPS. Claims against the bank for negligence and breach of fiduciary duty were presented to the jury, resulting in a $390 million adverse verdict that included punitive damages. The $350 million in compensatory damages, according to briefs filed in the case, had little or no relation to the amount of trust funds actually lost.
PNC Bank as successor to the Missouri bank and the American Bankers Association as amicus are pleading for the appellate court to recognize a distinct line between trust liability and tort liability. PNC and the ABA assert that fiduciaries should be assessed only under the law of equity, whereas the lower court permitted both equitable and legal claims to go to the jury. Appellants argue that a corporate trustee’s duties and responsibilities are governed by the trust agreement itself and by common and statutory trust law. If the lower court’s judgment is not overturned, according to the ABA, then there will be a severe impact on the ability and willingness of banks and trust companies to offer corporate trustee services.
Generally speaking, a corporate trustee is charged with taking appropriate measures to protect trust assets. The trustee’s violation of this charge, whether characterized as negligence or other tortious conduct, should result in liability that corresponds to the consequential detriment to the trust assets. If the PNC ruling is allowed to stand, corporate fiduciaries will likely need to review whether more risk-expansive tort law principles – foreseeability, duty, causation – might be applied to their role as trustee.
One might wonder whether any pronouncements from the Eighth Circuit will parallel the recent trend, now delayed, toward establishing fiduciary rules in the securities industry. We anticipate, however, the appellate court will be constrained by the unique circumstances presented in this case, including the Missouri statutory scheme supporting these “pre-need” funeral service trust accounts. The Eighth Circuit heard oral argument on September 20, 2016, so a decision could be forthcoming soon.